PRINCIPLES  OF 
POLITICAL  ECONOMY 


THE  LIBRARY 

OF 

THE  UNIVERSITY 

OF  CALIFORNIA 

RIVERSIDE 

GIFT  OF 
Dr.  Gordon  Watkins 


#nrtwn  ».  Waikbta 


PRINCIPLES  OF 
POLITICAL  ECONOMY 


BY 

THOMAS  NIXON  CARVER 
"i 


GINN  AND  COMPANY 

BOSTON  •  NEW  YORK  •  CHICAGO  •  LONDON 
ATLANTA  •  DALLAS  •  COLUMBUS  •  SAN  FRANCISCO 


COPYRIGHT,  1919,  BY  THOMAS  NIXON  CAKVER 
ALL  RIGHTS  RESERVED 


gftt   fltfttnaum   jPrt8< 

G1NN  AND  COMPANY  •  PRO- 
PRIETORS •  BOSTON  •  U.S.A. 


TO 

ALL  THOSE 

WHO  CARE  TO  SEE  THEIR  COUNTRY 
GROW  STRONG  AND  GREAT 


INTRODUCTION 

At  no  period  in  the  history  of  democracy  have  men  been 
compelled  to  think  so  seriously  about  the  question  of  the 
strength  of  democratic  nations  as  at  the  present  time.  At  no 
time  was  it  ever  so  plain  that  the  question  of  national  strength 
is  largely  an  economic  one.  It  is  the  purpose  of  this  book  to 
examine  the  economic  foundations  of  our  national  strength 
and  to  point  out  some  of  the  more  direct  methods  of  improve- 
ment, to  the  end  that  our  democratic  nation,  and  all  democratic 
nations,  may  grow  prosperous  and  great  in  all  the  elements  of 
national  greatness. 

This  result  can  never  be  achieved  unless  the  people  them- 
selves understand  the  economic  principles  upon  which  national 
prosperity  and  greatness  depend.  Subject  peoples  may  ignore 
these  principles,  relying  upon  their  rulers  to  supply  the  neces- 
sary economic  knowledge  and  expertness.  Democratic  peoples 
have  no  one  to  depend  upon  but  themselves  ;  therefore  they 
must  know  for  themselves  the  leading  principles  of  the  science 
of  political  economy. 


CONTENTS 

PART  ONE.    THE  UNDERLYING  CONDITIONS  OF 
NATIONAL  PROSPERITY 

CHAPTER  PAGE 

lir^WEALTH   AND   WELL-BEING 12 

III.  SELF-INTEREST 22 

IV.  COMPETITION 37 

V.  LAW  AND  GOVERNMENT 50 

VI.  MORALS  AND  RELIGION 64 

VII.  THE  GEOGRAPHICAL  SITUATION 78 

PART  TWO.    PRODUCTION 
SECTION  A.   THE  PRODUCTIVE  FORCES 
VIII.  THE  PRIMARY  FACTORS  OF  PRODUCTION  .  8q 


IX.  THE  QUALITY  OF  THE  PEOPLE 101 

X.  THE  DIVISION  OF  LABOR 119 

XI.  POWER  . 132 

XII.  LAND 142 

XIII.  CAPITAL 155 

XIV.  THE  ORGANIZATION  OF  BUSINESS 168 

X¥r"THE  BALANCING  OF  THE  FACTORS  OF  PRODUCTION   .     .  181 

SECTION  B.   THE  PRODUCTIVE  INDUSTRIES 

XVI.  THE  EXTRACTIVE  INDUSTRIES 193 

XVII.  THE  GENETIC  INDUSTRIES 208 

XVIII.  THE  MANUFACTURING  INDUSTRIES 221 

XIX.  TRANSPORTATION 233 

XX.  MERCHANDISING 245 

XXI.  PERSONAL  AND  PROFESSIONAL  SERVICE 255 

vii 


viii  PRINCIPLES  OF  POLITICAL  ECONOMY 

PART  THREE.    EXCHANGE 

CHAPTER          ,  PAGE 

XXrf  VALUE      ................  265 

XXIII.  SCARCITY      .  ^    .    .    ........    r    .    .  281 

XXIV.  MONEY      .......         ........  292 

XXV.  BANKING  .....    .    .    .........  304 

XXVI.  MARKETING.    .    .    .    .    .    .  ''.'    .    '.    .....  318 

XXV-lL-EcoNOMic  CRISES  .........    ....  329 

XXVIII.  FREE  TRADE     ..............  338 

XXIX.  PROTECTIONISM      .............  348 

PART  FOUR.   THE  DISTRIBUTION  OF  WEALTH 

XXX.  THE  LAW  OF  VARIABLE  PROPORTIONS     .....  365 

XXXI.  THE  GENERAL  NATURE  OF  THE  WAGE  QUESTION    .  378 

XXXII.  WHAT  DETERMINES  THE  RATE  OF  WAGES?     .     .     .  388 

XXXIII.  THE  ORGANIZATION  OF  LABORERS  .......  400 

XXXIV.  THE  RENT  OF  LAND  ............  409 

XXXV.  THE  SOURCE  OF  INTEREST      .........  418 

XXXVI.  THE  COST  OF  CAPITAL  AND  ITS  PRICE    .....  429 

XXXVII.  PROFITS    ................  441 

PART,  FIVE.   THE  CONSUMPTION  OF  WEALTH 


THE  MEANING  AND  IMPORTANCE  OF  CONSUMPTION  .  453 

XXXIX.  RATIONAL  CONSUMPTION     .....     .....  461 

XL.  LUXURY    ................  472 

CONTROL  OF  CONSUMPTION      .......  486 

.  THE  BATTLE  OF  THE  STANDARDS   .......  495 

PART  SIX.    PUBLIC  FINANCE 

XLIII.  TAXATION     ...............  503 

XLIV.  THE  FINANCING  OF  A  WAR    .........  514 


CONTENTS  ix 

PART  SEVEN.    REFORM 

CHAPTER  PAGE 

XLV.  COMMUNISM r,T 

XLVI.  SOCIALISM    ,  c  < , 

54* 

XLVII.  ANARCHISM rrr 

XLVIII.  THE  SINGLE  TAX     . S63 

XLIX.  CONSTRUCTIVE  LIBERALISM 572 


INDEX 


PART  ONE 

THE  UNDERLYING  CONDITIONS  OF  NATIONAL 
PROSPERITY 


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CHAPTER  I 
ECONOMY 

What  it  means  to  economize.  To  economize  is  to  choose 
among  several  different  things  which  one  would  like  to  have, 
giving  up  the  things  for  which  one  cares  less  in  order  to  have 
the  thing  for  which  one  cares  more.  Necessity  forces  this 
kind  of  choosing  not  only  upon  individuals  but  also  upon 
communities  and  nations.  Economics  is  the  name  given  to 
a  body  of  principles  which  govern  the  practice  of  economy 
in  its  broadest  sense. 

This  choosing  of  what  one  will  have  takes  on  many  and 
various  forms.  It  may  be  a  question  as  between  play  and 
work  or  between  different  kinds  of  work,  different  kinds  of 
play,  or  different  objects  which  one  might  purchase  with  one's 
limited  money  or  purchasing  power.  The  problem  is  always 
how  to  use  one's 'time,  one's  working  power,  or  one's  money 
in  such  a  way  as  to  accomplish  the  most  in  the  promotion  of 
one's  interest  or  the  fulfillment  of  one's  hopes  and  purposes. 
This  is  a  problem,  however,  not  for  the  individual  alone  but 
for  the  community,  the  nation,  and  the  world  at  large.  The 
community  and  the  nation,  like  the  individual,  have  common 
interests  which  can  be  promoted  only  by  common  effort. 
How  to  use  the  energy  of  the  community  and  of  the  nation 
economically,  that  is,  in  such  a  way  as  to  accomplish  the 
largest  and  best  possible  results,  is  a  problem  of  the  greatest 
possible  importance.  In  a  democracy  especially  it  is  fully  as 
important  that  the  citizen  should  understand  how  the  com- 
munity and  the  nation  may  economize  their  energies  and 
achieve  the  utmost  in  the  way  of  civilization  and  well-being 

3 


as  it  is  that  he  should  understand  how  he  may  economize  his 
own  individual  energy  and  accomplish  the  utmost  in  the  pro- 
motion of  his  own  interest  and  the  fulfillment  of  his  hopes. 
Moreover,  the  former  is  a  vastly  greater  and  more  difficult 
problem  than  the  latter.  It  will  require  a  broad,  careful,  and 
systematic  study  of  economic  principles  instead  of  a  narrow, 
piecemeal,  haphazard  study  of  individual  problems  in  economy. 

When  you  are  asked  to  do  a  certain  thing  and  you  reply 
that  you  have  not  time,  you  are  sometimes  merely  trying  to 
be  polite.  You  may  really  mean  that  there  is  something  else 
which  you  would  rather  be  doing  with  your  time,  or  which 
you  feel  that  it  is  more  important  that  you  should  do,  than 
the  thing  you  are  asked  to  do.  In  other  words,  you  have 
not  time  and  energy  enough  to  do  everything  you  would  like 
to  do  or  that  others  would  like  to  have  you  do.  You  must 
leave  many  things  undone,  and  you  must,  therefore,  choose 
rather  carefully  the  few  things  that  you  think  most  impor- 
tant or  that  would  cause  you  the  most  inconvenience  or 
pain  if  you  left  them  undone.  In  order  that  you  may  do 
these  few  and  important  things,  you  must  refuse  to  do  any- 
thing else  that  would  interfere.  That  is  what  it  means  to 
economize  time  and  energy.  It  is  choosing  to  do  the  more 
important  things,  leaving  the  less  important  things  undone. 
Economizing  in  the  use  of  money  is  only  one  special  form  of 
economizing  time  and  energy,  since  money  represents  the 
products  of  time  and  energy. 

Why  we  have  to  economize.  In  saying  that  you  do  not  have 
time  to  do  a  certain  thing,  you  are  stating  one  of  the  most 
fundamental  facts  of  life ;  namely,  the  great  and  ever-present 
fact  of  scarcity.  It  is  this  fact  which  compels  us  to  economize, 
which  compels  us  to  make  our  limited  fund  of  energy  and  our 
limited  time  go  as  far  as  they  will.  To  waste  time  or  energy 
is  to  fail  to  supply  ourselves  with  some  of  the  things  we  want. 
To  waste  things  that  have  already  been  produced  is  no  worse 
than  to  waste  the  time  and  energy  that  might  have  produced 


ECONOMY  5 

more  of  the  same  things.  Wasting  time  and  energy  is  not 
necessarily  remaining  idle,  though  it  may  mean  that.  It  may 
also  mean  the  doing  of  less  important  things  when  there  are 
more  important  things  to  be  done.  If  one  had  unlimited 
time  and  energy,  or  if  one  had  the  time  and  energy  necessary 
to  do  everything  one  would  like  to  do,  so  that  the  doing 
of  one  thing  never  prevented  the  doing  of  anything  else  that 
was  worth  doing,  economy  would  be  unnecessary.  If  that  were 
true,  human  life  and  human  history  would  be  very  different 
from  anything  we  now  know,  and  this  world  would  be  so  unlike 
the  present  world  that  none  of  us  would  recognize  it. 

But  time  and  energy  are  in  a  sense  convertible  into  goods 
and  commodities;  that  is,  into  the  products  of  industry  which 
are  the  means  of  satisfying  our  desires.  Therefore,  when  we 
say  that  we  cannot  afford  a  certain  article,  we  mean  very  much 
the  same  thing,  fundamentally,  as  when  we  say  that  we  have 
not  time  to  do  a  certain  thing.  In  both  cases  we  are  merely 
stating  the  great  fact  that  it  is  necessary  to  economize,  to 
choose  what  we  will  do  with  our  limited  energy  or  our  limited 
money  to  the  exclusion  of  other  things.  The  fact  that  time 
and  energy  are  insufficient  to  enable  us  to  do  everything  that 
we  might  like  to  do  makes  it  certain  that  we  cannot  produce 
everything  that  we  should  like  to  have,  and  that,  if  we  could, 
we  should  not  have  time  to  do  something  else.  If  we  were 
to  work  all  the  time,  we  should  have  no  time  to  play;  and 
everybody  likes  to  play  —  that  is,  everybody  worth  mention- 
ing. We  must  therefore  choose  whether  to  deprive  ourselves 
of  the  opportunity  to  play  in  order  to  get  certain  goods  that 
we  want,  or  to  reduce  somewhat  the  number  of  goods  we  con- 
sume in  order  to  have  more  time  to  play.  Again,  if  one  works 
too  long  on  one  kind  of  goods,  one  has  less  time  and  energy 
left  to  produce  others-.  At  every  step  in  the  life  of  every  nor- 
mal human  being,  therefore,  he  is  confronted  with  some  prob- 
lem in  economy.  As  already  stated,  the  necessity  for  economy 
grows  out  of  the  scarcity  of  something  or  other,  —  either  time 


6  PRINCIPLES  OF  POLITICAL  ECONOMY^ 

and  energy,  on  the  one  hand,  or  some  form  of  material  goods, 
on  the  other.  Find  an  individual  who  experiences  no  lack  or 
scarcity  of  anything,  and  I  will  show  you  an  individual  who 
has  no  need  for  economy ;  but  you  will  look  a  long  time 
before  you  find  him. 

Getting  and  spending.  In  the  practical  everyday  life  of  the 
average  person  problems  of  economy  are  mainly  focused  on  the 
problems  of  getting  and  spending,  —  of  income  and  expendi- 
ture, or  of  business  and  the  household.  If  one's  income  is 
less  than  one  would  like  to  have  it,  it  means  that  one's  desires 
run  beyond  one's  income.  Such  an  individual  therefore  tries, 
first,  to  increase  his  income  and,  second,  to  get  as  much  good 
out  of  it  as  he-can  ;  that  is,  to  spend  it  as  wisely  as  he  knows 
how.  This  is  true  not  only  of  every  individual  and  every 
family  but  also  of  every  organization,  even  the  State  itself, 
and  it  is  even  true  of  all  the  people  as  distinct  from  their 
government.  The  greater  part  of  the  time  and  energy  of  the 
people  of  this  world  is  spent  on  these  matters,  but  it  is  spent 
in  a  great  variety  of  ways. 

A  glance  at  the  diagram  at  the  beginning  of  this  chapter 
will  give  one  a  general  idea  of  all  the  forms  in  which  the  prob- 
lem of  income  and  expenditure  presents  itself.  The  reader  will 
get,  at  the  same  time,  an  idea  of  the  principal  branches  of  the 
great  science  of  economics,  for  economics  is,  in  one  aspect, 
simply  the  study  of  the  problem  of  income  and  expenditure. 
This  problem  is  in  turn  the  problem  of  economizing  time  and 
energy,  on  the  one  hand,  and  goods,  on  the  other.  Another 
way  of  saying  it  would  be  that  it  is  the  effort  to  make  things 
that  are  scarce  go  as  far  and  accomplish  as  much  as  possible. 

Economics,  —  household  management.  Originally  the  word 
economics  meant  "the  principles  of  household  management."  It 
comes  from  the  two  Greek  words,  ot/co?,  "a  house,"  and  i>eyu&>, 
"  manage."  It  was  simply  a  study  of  the  principles  of  house- 
hold management.  In  Xenophon's  treatise  on  this  subject  he 
discusses  the  management  of  a  simple  rural  household,  in 


ECONOMY  7 

which  the  business  that  furnishes  the  income  is  united  with 
the  home  in  which  the  income  is  spent  or  utilized.  In  fact, 
it  was  the  kind  of  rural  household  that  some  men  now  living 
can  still  remember,  where  nearly  everything  consumed  in  the 
household  was  produced  on  the  farm,  so  that  there  was  com- 
paratively little  buying  and  selling.  In  such  a  household  the 
problems  of  income  and  expenditure,  of  business  and  home 
life,  are  not  very  widely  separated.  The  income  was  made  up 
of  the  products  of  the  farm  and  not  of  the  money  for  which 
they  were  sold,  because  they  were  not  sold  at  all.  The  expendi- 
ture, if  such  it  may  be  called,  was  merely  the  utilization  of  those 
products,  and  not  the  spending  of  money,  because  there  was 
no  money  to  spend.  In  the  broadest  sense,  as  we  shall  see  a 
little  later,  that  is  what  constitutes  the  income  and  expenditure 
of  the  people  as  a  whole.  Individuals  may  buy  and  sell  among 
themselves,  but  the  people  as  a  whole  consume  their  own 
products.  In  recent  times,  especially  in  our  cities,  the  busi- 
ness that  is  the  source  of  income  is  so  widely  separated  from 
the  home,  where  the  income  is  utilized,  as  to  make  them  seem 
like  different  problems  altogether.  In  fact,  we  now  have  two 
distinct  subjects,  or  branches,  of  private  economics,  known 
respectively  as  business  economics  and  home  economics.  That 
these  two  branches,  which  the  Greeks  regarded  as  parts  of  the 
same  subject,  are  now  so  sharply  separated  is  a  sign  that  we 
have  gone  a  long  way  from  the  condition  in  which  business 
and  life  were  united,  toward  a  condition  in  which  they  are  to 
be  completely  divorced.  This  should  make  us  ponder  seri- 
ously, because,  while  it  is  doubtless  in  many  ways  a  good 
tendency,  it  is  in  other  ways  a  bad  one. 

Public  income  and  expenditure.  But  the  problem  of  income 
and  expenditure  is  a  serious  question  for  the  public  as  a  whole 
as  well  as  for  the  private  citizen.  The  State  gets  its  income 
from  different  sources  and  by  different  methods  from  those 
pursued  by  the  individual,  but  income  is  as  necessary  to  a 
State  as  to  a  citizen.  In  order  that  its  limited  income  may 


8  PRINCIPLES  OF  POLITICAL  ECONOMY 

go  as  far  as  possible  and  accomplish  the  greatest  possible 
good,  the  question  of  public  expenditure  must  be  studied  with 
the  greatest  care.  It  is  scarcity  in  this  case,  as  well  as  in  the 
case  of  the  individual,  which  makes  economy  necessary.  If  we 
could  imagine  a  State  with  an  unlimited  income,  —  which  we 
cannot,  —  so  that  when  it  spent  money  for  one  purpose  it  was 
not  necessary  to  refrain  from  spending  money  for  any  other 
purpose,  there  would,  of  course,  be  no  occasion  for  public 
economy.  Xenophon,  who  wrote  our  oldest  treatise  under  the 
title  of  "  Economics,"  also  wrote  a  treatise  on  "  The  Revenues 
of  Athens."  In  the  former  work  he  was  well  within  the  field 
of  private  economics,  but  in  the  latter  he  had  got  well  over 
into  the  field  of  public  economics.  This  branch  of  public  eco- 
nomics, or  political  economy  (that  is,  the  branch  which  deals 
with  the  revenues  and  expenditures  of  the  State,  or  with  what 
has  been  called  the  housekeeping  of  the  State),  is  commonly 
called  public  finance.  It  will  readily  be  seen  that  there  is  a 
close  resemblance  between  public  finance,  which  deals  with  the 
income  and  expenditure  of  the  government,  and  private  eco- 
nomics, which  deals  with  the  income  and  expenditure  of  the 
private  family. 

Social  well-being.  But  there  is  another  branch  of  public 
economics  which  is  broader  than  public  finance ;  that  is,  the 
branch  which  deals  with  the  general  problem  of  social  wealth 
or  well-being.  This  branch  deals  neither  with  the  income  and 
expenditure  of  the  individual  family  as  such  nor  with  those 
of  the  government  as  such.  It  deals  rather  with  the  income 
and  expenditure  of  the  people  as  a  whole.  This  is  called 
social  economy  or  social  economics.  It  is  the  most  impor- 
tant study  for  the  real  statesman  or  nation  builder.  Since  in 
a  democracy  everyone  is  a  nation  builder,  in  a  small  way  at 
least,  in  that  he  helps  to  determine  the  policy  of  the  nation, 
it  is  of  the  greatest  possible  importance  that  everyone  should 
study  the  problems  of  social  economy  as  well  as  those  of 
public  finance  and  private  economics. 


ECONOMY  9 

The  management  of  the  king's  household.  A  good  illustra: 
tion  of  the  importance  of  this  subject  is  found  in  the  studies 
of  a  group  of  scholars  who,  some  hundreds  of  years  ago,  were 
studying  the  problem  of  providing  for  the  king's  household. 
These  were  the  finance  ministers  of  certain  kings  of  Euro- 
pean countries.  They  are  now  sometimes  called  the  cameral- 
ists.  Having  charge  of  the  affairs  of  the  king's  household, 
they  were,  in  a  sense,  studying  private  economics ;  but  since 
the  king  was  a  public  functionary,  deriving  much  of  his 
revenue  from  taxation  and  other  public  sources  and  perform- 
ing many  of  the  acts  of  government,  these  finance  ministers 
were,  in  another  sense,  studying  public  economics.  At  any 
rate,  they  were  severely  put  to  it  to  find  revenue  enough  to  pay 
the  expenses  of  the  royal  household  or  to  keep  the  expenses 
within  the  royal  revenues ;  that  is,  to  balance  income  and 
expenditure.  These  were  problems  in  economy.  How  to  get 
as  large  an  income  as  possible  with  the  limited  energy  at  their 
disposal,  and  how  to  expend  that  income  so  as  to  add  the 
maximum  to  the  resources  of  the  king's  household,  were 
very  serious  problems. 

The  social  income.  The  more  they  studied  this  problem, 
the  more  clearly  they  saw  that  in  order  to  increase  the  royal 
income  the  people  over  whom  the  king  ruled  must  be  made 
prosperous ;  that  is,  the  social  income  must  also  be  increased. 
"  Poor  people,  poor  king "  came  to  be  an  axiom  in  public 
finance.  Therefore  attention  was  given  to  the  problem  of  in- 
creasing the  social  income  or  of  promoting  the  prosperity  of 
all  the  people.  Later  writers  have  given  their  chief  attention 
to  this  part  of  the  problem.  In  the  outline  at  the  beginning 
of  this  chapter  this  is  called  social  economy. 

Exchange.  In  one  sense,  as  already  pointed  out,  the  social 
income  is  the  annual  production  of  the  nation.  So  there 
was  a  tendency  at  first  to  give  chief  attention  to  the  subject 
of  production,  but  it  was  soon  discovered  that  in  social  econ- 
omy exchange  was  an  important  factor.  In  studying  thq 


10  PRINCIPLES  OF  POLITICAL  ECONOMY 

internal  economy  of  an  individual  household,  whether  a  pri- 
vate or  a  royal  household,  exchange  among  the  members  could 
be  left  out  of  account ;  but  in  studying  the  internal  economy 
of  a  whole  nation  it  could  not  be  left  out  of  account,  for  the 
obvious  reason  that  the  citizens  of  the  nation  did  a  great  deal 
of  exchanging  among  themselves.  This  is  particularly  true  of 
the  modern  nations.  Buying  and  selling  has  come  to  be  so 
large  a  part  of  the  economic  life  of  the  people  that  for  a  long 
time  it  seemed  to  many  students  to  be  the  most  important 
aspect  of  economic  life.  So  there  came  a  time  when  the 
chief  emphasis  was  laid  upon  exchange  rather  than  upon 
production.  Indeed,  it  was  assumed  for  a  time  that  produc- 
tion would  almost  take  care  of  itself ;  that  is,  each  individual 
would  look  after  his  own  part  in  it  if  only  the  government 
would  provide  him  safe  and  open  markets  and  a  convenient 
medium  of  exchange  in  the  form  of  money  and  sound  banking 
facilities. 

Distribution  of  social  income.  Still  later,  another  problem 
was  discovered  to  be  of  equal  or  greater  importance.  Like  the 
problem  of  exchange,  this  was  one  which  could  also  be  ignored 
in  the  study  of  private  economics.  It  is  the  problem  of  the 
division  of  the  products  of  industry  among  the  workers.  When 
a  large  number  of  people  take  part  in  the  production  of  a  given 
commodity,  say  shoes,  the  question  as  to  how  much  of  the 
value  of  the  shoes  shall  go  to  each  person  or  group  of  persons 
is  of  the  utmost  importance  in  social  economy.  The  farmer, 
the -miller,  and  the  baker,  as  well  as  the  carrier,  have  all  had 
something  to  do  with  the  production  of  a  loaf  of  bread.  It  is 
very  important  to  know-how  much  of  the  value  of  the  bread 
goes  to  each  of  those  who  have  had  a  part  in  its  production. 
This  is  called  the  problem  of  distribution  ;  as  you  will  see,  it 
is  somewhat  different  from  the  problem  of  exchange,  though 
very  closely  related  to  it.  Such  questions  as  the  wages  of  dif- 
ferent classes  of  laborers,  the  rent  of  land,  the  interest  on  capi- 
tal, the  profits  of  enterprise,  are  parts  of  the  general  problem 


ECONOMY  1 1 

of  distribution.  During  the  last  fifty  years,  it  is  fair  to  say, 
more  emphasis  has  been  laid  upon  the  subject  of  distribution 
than  upon  either  production  or  exchange. 

The  utilization  of  the  social  income.  While  the  consump- 
tion of  the  people  has  been  recognized  as  the  utilization  of  the 
social  income,  and  therefore  as  a  thing  important  in  itself,  yet 
students  have  almost  ignored  it  as  a  branch  of  the  science  of 
economics.  One  reason  has  doubtless  been  the  feeling  that 
every  individual  would  better  be  left  to  consume  his  income 
as  he  liked,  whether  he  did  it  wisely  or  foolishly,  beneficially 
or  harmfully.  Attempts  to  control  or  direct  his  consumption 
have  been  called  sumptuary  laws.  By  pronouncing  these  words 
with  a  wry  face  such  attempts  may  be  discredited,  that  is,  for 
a  time.  Meanwhile,  however,  every  progressive  community 
has  gone  right  on  passing  sumptuary  laws,  in  one  form  or 
another,  sometimes  to  the  great  advantage  of  the  people,  some- 
times to  their  disadvantage.  Students  are  therefore  becoming 
convinced  that  the  consumption  of  wealth  merits  a  great  deal 
of  study,  that  it  is  going  to  be  controlled  and  directed  by  the 
State  whether  we  like  it  or  not,  and  that  whether  it  is  con- 
trolled and  directed  wisely  or  unwisely  will  depend  upon  how 
carefully  and  intelligently  it  is  studied.  In  fact,  a  few  are 
already  beginning  to  discover  that  consumption  is  more  impor- 
tant than  production,  exchange,  or  distribution, —  possibly  more 
important  than  all  three  combined. 


CHAPTER  II 

WEALTH  AND  WELL-BEING 

What  are  economic  goods?  Before  we  can  go  very  far  in 
our  study  of  income  and  expenditure,  or  of  production  and 
consumption,  we  must  get  a  fairly  clear  idea  as  to  the  sort 
of  things  that  make  up  income,  or  the  sort  of  things  that 
men  try  to  produce.  When  it  was  stated  in  the  last  chapter 
that  the  necessity  for  economy  arose  out  of  the  fact  of  scarcity, 
it  might  have  been  guessed  at  once  that  the  things  that  make 
up  one's  income  in  a  strictly  economic  sense  are  the  things 
that  are  scarce.  More  accurately,  perhaps,  we  should  say  that 
the  only  things  we  try  to  produce  are  the  things  of  which 
we  do  not  have  enough.  It  may  sound  a  little  queer  at  first 
for  one  to  say  that  his  income  consists  of  things  that  are 
scarce,  or  things  of  which  he  does  not  have  enough.  It 
will  therefore  be  necessary  to  spend  some  time  in  making  this 
point  absolutely  clear ;  otherwise  we  shall  never  be  free  from 
error  and  confusion.  As  a  matter  of  fact,  the  very  first  step 
toward  a  true  understanding  of  the  nature  of  wealth  is  a  clear 
perception  that  wealth  in  the  economic  sense  consists  of  things 
that  are  scarce  and  so  need  to  be  economized.  When  it  is 
said  that  the  necessity  for  economy  grows  out  of  scarcity,  and 
that  we  only  try  to  produce  the  things  that  are  scarce,  we  do 
not  imply  that  everything  is  scarce.  Some  very  useful  things 
are  very  abundant,  —  so  abundant  that  everyone  can  have  all 
he  wants ;  and  when  he  gets  all  he  wants,  no  one  else  is 
deprived  of  anything  that  he  wants.  Such  things  do  not  have 
to  be  economized ;  hence  they  are  not  economic  goods.  In 
fact,  so  long  as  they  are  sufficiently  abundant,  they  give  us  no 
concern ;  but  when  they  become  scarce,  we  spend  our  time  in 


WEALTH  AND  WELL-BEING  13 

trying  to  get  more.  Only  those  things  are  economic  good's 
which  have  to  be  economized,  that  is,  which  are  scarce,  or  of 
which  we  do  not  have  as  much  as  we  should  like  to  have. 

Two  meanings  of  wealth.  Now  the  word  wealth  has  two 
meanings.  In  the  first  place,  it  is  the  collective  name  for  all 
economic  goods,  or  for  all  goods  that  have  to  be  economized, 
—  that  is,  for  goods  that  are  scarce.  In  the  second  place,  it 
is  the  name  of  a  condition  or  state  of  being.  It  comes  from 
the  older  word  weal,  which  means  very  much  the  same  as 
well-being:  These  two  meanings,  while  apparently  different, 
are  yet  very  closely  related.  The  condition  of  well-being  which 
we  call  wealth  depends  upon  the  possession  of  an  adequate 
supply  of  those  things  which  we  call  wealth,  that  is,  the  things 
which  are  ordinarily  scarce  and  which  have  to  be  economized. 
Fie  who  lacks  an  adequate  supply  is  poor ;  he  who  possesses 
an  adequate  supply  is  rich  or  in  a  state  of  wealth.  In  short, 
those  economic  goods  called  wealth  are  the  goods  upon 
which  weal,  or  well-being,  depends.  Well-being  is  increased 
when  these  goods  are  increased  or  economized  ;  well-being 
is  decreased  when  these  goods  are  decreased  or  wasted. 

How  well-being  depends  upon  wealth.  This  could  not  be 
said  of  anything  which  is  not  scarce.  There  is  such  an  abun- 
dance of  air,  for  example,  under  ordinary  circumstances,  that 
no  one  would  be  any  better  off  than  he  is  now  if  the  supply 
of  air  could  be  increased,  nor  would  anyone  be  any  worse  off 
if  the  supply  of  air  were  slightly  decreased.  In  other  words, 
no  one's  well-being  depends  upon  more  air,  even  if  it  could 
be  produced.  If,  however,  air  were  so  scarce  that  there  was 
not  enough  to  go  around,  then  not  only  would  it  need  to  be 
economized  very  carefully,  but  there  would  be  some  advantage 
in  producing  more  of  it.  The  weal,  or  well-being,  of  mankind 
would  be  improved  in  proportion  as  more  air  could  be  pro- 
duced ;  mankind  would  be  injured  in  proportion  as  air  was 
wasted  or  destroyed.  While,  therefore,  we  can  say  that  air 
is  a  necessity  in  a  certain  absolute  sense,  yet  in  a  practical 


14  PRINCIPLES  OF  POLITICAL  ECONOMY 

economic  sense  we  cannot  say  that  anyone  would  be  better  off  if 
more  air  were  produced  or  if  it  were  even  wisely  economized  ; 
nor  can  we  say  that  anyone  would  be  worse  off  if  a  little  air 
were  destroyed  or  wasted.  There  would  still  be  enough  to 
satisfy  everybody.  That  is  why  air,  though  an  absolute  neces- 
sity, is  not  an  economic  good.  We  should  gain 'nothing  by 
trying  to  increase  the  supply  or  to  economize  in  the  use  of 
the  existing  supply.  Since  we  do  not  gain  anything  by  econo- 
mizing it,  it  is  not  an  economic  good.  Where  abnormal  cir- 
cumstances arise,  in  which  there  is  not  enough  air,  then  it 
has  to  be  economized  and  becomes  at  that  particular  time  and 
place  an  economic  good.  If  such  circumstances  could  last,  air 
would  become  wealth  in  the  same  sense  that  food,  clothing, 
fuel,  and  certain  other  things  are  now  wealth.  It  would  then 
be  true  of  air,  as  of  these  other  things,  that  well-being  could  be 
increased  by  producing  or  economizing  air  and  decreased  by 
destroying  it,  wasting  it,  or  otherwise  making  it  scarcer. 

The  question  of  having  more  or  having  less.  Water  is 
another  illustration,  perhaps  a  better  one  because  there  are 
many  places  where  water  is  so  abundant  that  it  does  not  have 
to  be  economized  at  all,  while  there  are  other  places  where  it 
is  so  scarce  that  it  has  to  be  economized  very  carefully  indeed. 
In  the  former  places  water  is  not  wealth ;  in  the  latter  it  is. 
In  the  former  no  one  labors  to  secure  any  more ;  in  the  latter 
they  do.  In  the  former  no  one  would  be  better  off  if  there 
were  more  water ;  in  the  latter  some  people  would  be  better  off. 
In  the  former,  well-being  does  not  depend  upon  a  little  more 
or  a  little  less  water ;  in  the  latter  it  does.  In  the  former  class 
of  cases  there  is  no  occasion  for  economizing  water ;  in  the 
latter  it  is  very  important  that  it  be  economized  and  made  to 
go  as  far  as  possible.  In  the  former  class  of  cases  the  formula 
"more  water,  greater  well-being;  less  water,  less  well-being" 
is  not  true ;  in  the  latter  it  is  true.  This  is  the  test  in  every 
time  and  place  as  to  whether  water  is  wealth  or  not.  All 
that  has  been  said  of  water  may  be  said  of  anything  else. 


WEALTH  AND  WELL-BEING  15 

The  same  test  must  be  applied  to  determine  whether  it  is  wealth 
or  not.  As  a  matter  of  fact,  water,  like  a  great  many  other 
things,  is  sometimes  too  abundant,  —  so  abundant  that  men 
find  it  to  their  advantage  to  go  to  considerable  pains  in  order 
to  get  rid  of  some  of  it  or  to  lessen  the  supply.  In  such  cases 
it  may  be  called  tilth.  In  the  diagram  on  page  16  is  a  classifi- 
cation of  all  tangible  objects  with  which  it  would  be  possible 
for  man  to  concern  himself.  Those  which  are  harmful  to  him  he 
must  try  to  exterminate.  Toward  those  which  are  useless  with- 
out being  in  the  way  or  being  otherwise  harmful  he  is  indif- 
ferent. Those  which  are  useful  to  him,  called  goods,  concern 
him  most.  Of  these,  some  are  too  abundant  at  certain  times 
and  places.  In  such  times  and  places  his  attitude  toward  them 
must  be  very  much  the  same  as  that  toward  those  which  are 
positively  harmful.  Yet  when  they  exist  in  smaller  quantities, 
that  is,  in  quantities  less  than  he  needs,  he  will  strive  as  hard 
to  get  more  as  he  will  strive  to  reduce  the  supply  when  it  is 
too  abundant.  Water  in  swampy  land  is  an  example  of  over- 
abundance ;  in  desert  land,  of  underabundance.  Manure  in  a 
city  livery  stable  is  an  equally  good  example  of  overabundance ; 
in  a  sterile  field,  of  underabundance.  If  the  owner  of  the 
stable  could  not  sell  the  manure,  or  induce  someone  to  take 
it  away,  he  would  be  willing  to  pay  someone  to  remove  it. 
To  the  market  gardener  it  is  wealth ;  and  if  he  cannot  other- 
wise secure  it,  he  will  pay  the  owner  of  the  stable  for  it.  In 
that  case  it  is  scarce  from  the  standpoint  of  the  whole  com- 
munity, and  is  therefore  social  wealth.  If,  however,  there  is 
more  than  even  the  market  gardeners  and  farmers  can  use, 
they  would  be  paid  for  hauling  it  away  instead  of  having  to 
pay  for  the  privilege.  Such  goods,  when  they  are  overabun- 
dant, may,  as  suggested  above,  be  called  illth,  to  distinguish 
them  from  those  which  are  underabundant  and  called  wealth. 
Relation  of  value  to  economic  goods.  We  have  gone  to  con- 
siderable pains  to  point  out  that  one  characteristic  of  economic 
goods  is  that  they  are  always  scarce.  It  is  this  which  gives 


16 


PRINCIPLES  OF  POLITICAL  ECONOMY 


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WEALTH  AND  WELL-BEING  17 

them  the  power  to  induce  men  to  work.  Another  characteristic 
is  that  they  all  have  value,  or  power  in  exchange.  The  power 
to  command  other  desirable  things  in  peaceful  and  voluntary 
exchange  —  that  is,  value  —  is  very  much  the  same  as  the 
power  to  induce  men  to  work.  That  is  to  say,  the  thing  which 
possesses  one  kind  of  power  will  always  possess  the  other,  if 
indeed  it  be  not  incorrect  to  speak  of  them  as  different  kinds 
of  power.  The  object  which  possesses  this  power  to  appeal 
to  human  motives  in  such  a  way  as  to  induce  men  either  to 
give  up  some  desirable  object  in  exchange  for  it  or  to  labor 
in  order  to  produce  it,  is  always  said  to  be  valuable.  This 
power  depends  in  all  cases  upon  the  scarcity  or  insufficiency 
of  the  existing  supply  of  the  object  in  question.  This  simply 
amounts  to  the  truism  that  a  thing  would  not  possess  this 
power  unless  someone  could  be  found  who  wanted  more  of 
it  than  he  had.  If  a  person  or  a  considerable  number  of  per- 
sons can  be  found  who  want  more  than  they  have,  there  will 
be  someone  who  will  give  up  something  in  order  to  get  more 
or  who  will  work  in  order  to  produce  more.  These  things, 
again,  are  economic  goods,  or  wealth.  Since,  as  we  have  just 
shown,  they  all  possess  value,  it  amounts  to  the  same  thing  to 
say  that  wealth  consists  of  things  that  have  value.  In  short, 
such  words  as  wealth,  vahie,  economic  goods,  and  economy  all 
center  around  the  one  great  fact  of  scarcity,  that  is,  the  insuf- 
ficiency of  certain  things  at  certain  times  and  places  to  satisfy 
desires.  Out  of  this  great  fact  grow  also  such  ideas  as  prop- 
erty, industry,  and  foresight.  No  one  wants  to  secure  property 
rights,  for  example,  in  anything  of  which  everybody  has  enough. 
But  when  anyone  fears  that  there  may  not  be  enough  of  a  cer- 
tain thing  to  go  around,  and  that  he  may,  therefore,  be  left 
out,  he  naturally  wants  to  guard  against  that  calamity  by  get- 
ting possession  of  a  supply.  He  will  try  to  get  possession  of 
a  supply  either  by  producing  it  himself  or  by  buying  it  of 
someone  else,  and  he  will  try  to  guard  his  treasure  carefully. 
When  the  State  steps  in  and  undertakes  to  protect  him  in  his 


1 8  PRINCIPLES  OF  POLITICAL  ECONOMY 

possession,  he  has  then  secured  a  property  right  in  the  thing 
in  question.  Again,  productive  industry,  as  already  shown, 
is  directed  toward  alleviating  scarcity  or  increasing  the  sup- 
ply of  something  whose  supply  would  otherwise  be  insuffi- 
cient. Frugality  and  foresight  are  exercised  to  provide  against 
further  scarcity. 

Meaning  of  scarcity.  Now  scarcity  means  nothing  except 
insufficiency  in  a  given  time  and  place  to  satisfy  the  desires 
which  exist  in  that  time  and  place.  It  does  not  mean  rarity, 
because,  no  matter  how  rare  a  thing  may  be,  if  there  is  as 
much  as  is  wanted,  it  is  not  scarce ;  and  no  matter  how  great 
the  total  quantity,  if  there  is  less  than  is  wanted,  it  is  insuffi- 
cient, or  scarce.  And  it  is  always  well  to  bear  in  mind  that  a 
thing  is  scarce,  if  at  all,  because  the  available  quantity  in  a 
given  time  and  place  is  insufficient.  No  matter  how  much 
water  there  may  be  in  the  Mississippi  River,  it  does  not  alter 
the  fact  that  water  is  scarce  a  few  hundred  miles  to  the  west- 
ward ;  no  matter  how  much  copper  there  may  be  in  the 
bowels  of  the  earth,  it  does  not  alter  the  fact  that  there  is 
less  copper  in  available  form  than  is  needed  on  the  surface. 
It  is  this  fact  which  induces  men  to  labor  to  move  things  from 
one  place  to  another. 

Before  proceeding  farther  it  is  necessary  to  make  one  im- 
portant qualification.  Men  do  not  always  know  upon  what 
their  weal,  or  well-being,  depends.  If  they  are  mistaken  on  any 
phase  of  this  question,  they  will  be  placing  a  high  value  upon 
some  things  that  are  not  good  for  them,  and  a  low  value  or 
no  value  at  all  upon  some  things  that  are  good  for  them. 
They  are  poor  economizers  who  do  this,  but  there  are  many 
poor  economizers  in  the  world.  This  is  the  same  as  saying 
that  they  will  sometimes  desire  more  of  a  thing  than  they 
have,  when  they  really  have  too  much  already,  or  less  than 
they  have,  when  they  really  have  too  little  already.  With  this 
qualification  in  view,  all  we  can  say  is  that  men  will  regard 
as  wealth  everything  upon  which  they  think  their  well-being 


WEALTH  AND  WELL-BEING  19 

depends  in  the  practical  economic  sense  described  above.  That 
is,  if  they  think  they  need  more  than  they  have,  they  will 
strive  to  get  more,  either  by  offering  something  for  it,  thus 
giving  it  a  market  value,  or  by  trying  to  produce  it,  thus  creat- 
ing an  industry.  This  explains  why  it  is  that  the  student  of 
economics  is  sometimes  compelled  to  include  among  economic 
goods,  or  wealth,  articles  which  he  himself  would  not  use 
or  which  he  regards  as  deleterious,  such  as  opium,  alcoholic 
drinks,  or  tobacco. 

Importance  of  desiring  the  right  things.  Teaching  or  per- 
suading people  to  want  the  right  things  has  commonly  been 
regarded  as  the  work  of  the  educator  and  the  preacher  rather 
than  the  economist.  The  latter  has  not  generally  undertaken 
to  pass  judgment  on  the  wants  of  the  people.  He  has  assumed, 
rather,  that  his  work  was  done  when  he  had  shown  how  such 
wants  as  the  people  happen  to  have  are  satisfied  and  may  be 
satisfied  more  and  more  fully.  But  no  one  who  really  has  at 
heart  the  welfare  of  the  people  can  be  indifferent  to  the  quality 
of  their  wants  or  desires.  What  men  want  most  they  will  try 
hardest  to  get ;  the  character  of  their  wants  or  desires,  rather 
than  their  real  needs,  will  therefore  determine  the  character 
of  their  industries  and  their  government.  But,  more  important 
than  that,  if  their  desires  are  opposed  to  their  needs  (that  is,  if 
they  desire  things  that  are  harmful  to  them),  then  the  more  effi- 
cient their  system  of  production  becomes  the  more  harm  they 
will  do  themselves.  In  that  case  an  efficient  industrial  system 
promotes  national  deterioration  rather  than  national  well-being. 
If  one  were  to  make  a  study  of  the  wreckage  of  nations,  one 
would  probably  find  that  more  had  decayed  because  their  wants 
were  wrong  than  because  they  were  not  able  to  supply  their 
wants.  That  is  one  reason  why,  as  stated  earlier  in  this  chapter, 
the  subject  of  consumption  is  of  such  tremendous  importance. 

Necessity  of  economizing  means  of  production.  Thus  far  in 
discussing  the  necessity  for  economy  we  have  been  considering 
the  direct  satisfaction  of  wants  and  the  means  thereto.  But  the 


20  PRINCIPLES  OF  POLITICAL  ECONOMY 

necessity  for  economy  extends  much  farther  than  this.  In 
the  effort  to  overcome  scarcity,  that  is,  in  the  production  of 
goods,  it  is  necessary  to  make  use  of  various  factors  of  produc- 
tion, such  as  labor,  tools,  raw  materials,  etc.  These  also  are 
scarce  and  have  to  be  economized.  To  be  sure,  many  things 
that  are  essential  to  production  are  not  scarce.  These  are  not 
considered  as  factors  of  production ;  that  is,  they  are  not  eco- 
nomic factors  of  production  at  all.  Carbon  dioxide  is  just  as 
essential  to  the  growing  of  plants  as  nitrogen,  phosphorus, 
or  potash  ;  but  there  is  plenty  of  carbon  dioxide  in  the  air, 
whereas  in  most  soils  nitrogen,  phosphorus,  and  potash  are 
scarce  or  tending  to  become  scarce.  Therefore  these  three 
substances  are  considered  as  factors  (that  is,  economic  factors) 
in  plant  growth.  Applying  the  same  formula  here  as  we  did 
to  other  things  earlier  in  this  discussion,  we  can  say,  and  say 
truly,  "  More  nitrogen,  more  plant  growth ;  less  nitrogen,  less 
plant  growth."  Therefore  agricultural  production  is  increased 
by  increasing  the  nitrogen  in  the  soil.  The  same  may  be  said 
of  phosphorus  and  potash,  but  the  formula  does  not  seem  to 
apply  to  carbon  dioxide.  This  is  a  principle  of  the  very  great- 
est importance,  as  will  be  seen  later.  Some  of  the  greatest 
problems  in  economics  and  social  justice  depend  upon  this 
principle  and  are  incapable  of  solution  without  it. 

Why  a  thing  has  value.  The  fact  that  desirability  and 
scarcity,  and  these  alone,  give  value  to  a  thing  is  perhaps 
clearly  enough  established  by  this  time.  Few  will  care  to  ques- 
tion the  statement  that  not  only  must  a  thing  be  desired,  but 
more  must  be  desired  than  there  is  to  be  had,  before  men 
will  strive  to  get  more  either  by  purchase  or  by  production. 
Moreover,  this  is  as  true  of  a  factor  used  in  production,  such 
as  tools,  as  of  an  article  of  direct  consumption,  such  as  bread. 
It  may  not  be  quite  so  obvious,  but  it  is  none  the  less  true,  that 
this  is  also  one  of  the  great  sources  of  that  conflict  of  human 
interests  which  gives  rise  to  most  of  our  problems  of  justice 
and  equity.  This  will  be  discussed  in  the  next  chapter. 


WEALTH  AND  WELL-BEING  21 

TEN  CHARACTERISTICS  OF  ECONOMIC   GOODS,   OR  WEALTH 

1 .  They  are  scarce ;  that  is,  there  is  less  of  them  than  is  wanted. 

2.  They  have  to  be  economized. 

3.  Well-being  is  thought  to  increase  as  they  increase  and  to  decrease  as 
they  decrease. 

4.  Men  labor  to  produce  them,  that  is,  to  make  them  less  scarce. 

5.  Men  try  to  secure  them  by  purchase. 

6.  They  have  value,  or  power  in  exchange. 

7.  They  become  the  subject  of  property  rights. 

8.  Wise  men  exercise  frugality  and  foresight  with  respect  to  them. 

9.  There  is  a  conflict  of  interests  among  men  with  regard  to  them, 
because  there  is  not  enough  of  them  to  go  around  and  satisfy  everybody. 

10.  They  give  rise  to  questions  of  justice  and  equity. 


CHAPTER  III 
SELF-INTEREST 

The  fact  that  we  are  going  to  study  the  problem  of  national 
prosperity  and  progress  certainly  implies  that  we  have  an  inter- 
est in  it.  It  probably  implies  also  that  we  care  somewhat  more 
for  the  prosperity  or  progress  of  our  own  nation  than  for  that 
of  other  nations.  That  would  mean  that  we  are  somewhat 
self-centered.  Even  the  humanitarian  who  professes  to  care 
for  mankind  above  all  nations  seems  still  to  prefer  mankind 
to  other  species.  There  are  people  who  have  so  deep  an 
interest  in  animals  as  to  make  them  unwilling  to  sacrifice  any 
animal  for  the  benefit  of  mankind.  They  are  slightly  less  self- 
centered  than  the  humanitarians,  but  even  they  cannot  take 
quite  the  same  interest  in  the  lower  as  in  the  higher  animals. 
In  short,  no  one  can  avoid  being  slightly  self-centered,  caring 
more  for  some  animals  than  for  others,  for  certain  races  or 
nationalties  of  men  than  for  others,  or  even  for  certain  per- 
sons than  for  others.  Generally  it  will  be  found  that  those 
species,  nationalities,  or  persons  for  whom  we  care  most  are 
in  some  sense  nearer  to  ourselves  than  those  for  whom  we 
care  least. 

This  fact  of  self-centered  interest  must  be  taken  as  one  of 
the  original,  or  primary,  facts  in  our  problem  of  nation  build- 
ing. It  is  therefore  very  important  that  we  examine  it  and 
see  exactly  what  it  means. 

What  is  self-interest?  Our  discussion  will  center  naturally 
around  two  main  questions  :  first,  what  does  it  mean  to  be  self- 
interested  ;  and,  second,  is  it  a  good  or  a  bad  thing  for  each 
individual  to  be  self-interested,  or  at  least  slightly  self-centered, 
as  we  shall  call  it.  In  discussing  the  first  of  these  questions 


SELF-INTEREST  23 

it  is  not  necessary  to  go  very  far  into  that  form  of  hair-splitting 
analysis  which  considers  whether  benevolence  is  not  merely 
another  form  of  selfishness.1  It  is  sometimes  argued  by  a 
certain  kind  of  sophist  that  the  benevolent  person  is  benevo- 
lent because  he  gets  pleasure  from  being  benevolent.  Since 
it  gives  him  pleasure,  it  is  only  a  form  of  self-gratification  ;  and 
since  it  is  only  a  form  of  self-gratification,  it  is  only  another 
form  of  selfishness.  It  may  be  true,  from  a  certain  point  of 
view,  that  a  man  may  get  more  pleasure  from  the  taste  of  food 
upon  the  palates  of  his  children  than  upon  his  own.  A  soph- 
ist might  say  that  he  was  as  truly  selfish  as  a  man  who  got 
no  pleasure  whatever  from  the  taste  of  food  upon  any  palate 
but  his  own.  However,  no  sensible  person  would  remain  long 
in  doubt  as  to  which  would  make  the  better  father.  There  is 
no  doubt  that  the  man  who  takes  some  delight  in  the  welfare  of 
his  neighbors  and  fellow  citizens  is  a  better  neighbor  and  citizen 
than  a  man  who  takes  no  pleasure  whatever  in  such  things. 

In  trying  to  understand  what  self-interest  really  is,  there 
are  two  extreme  views  to  be  avoided.  One  is  that  self-interest 
means  such  extreme  selfishness  as  to  show  no  regard  whatever 
for  the  interests  of  others ;  the  other  is  that  benevolence  means 
a  real  preference  for  other  people  as  compared  with  self.  Now 
self-interest  simply  means  some  preference  for  self  as  com- 
pared with  certain  other  people ;  and  benevolence,  instead  of 
meaning  a  preference  for  other  people,  is  quite  compatible 
with  some  degree  of  preference  for  self.  There  is  probably  no 
human  being  who  has  not  some  interest  in  other  people  besides 
himself ;  neither  is  there  anyone  who  does  not  care  more  for 
himself  than  he  does  for  other  individuals  outside  a  rather 
narrow  family  or  neighborhood  circle. 

The  difference  between  a  selfish  and  a  benevolent  person. 
As  a  matter  of  fact,  the  difference  between  a  selfish  and  a 
benevolent  person  is  one  of  degree.  An  extremely  selfish 

1  See  the  author's  "  Essays  in  Social  Justice,"  p.  60.  Harvard  University 
Press,  1915. 


24  PRINCIPLES  OF  POLITICAL  ECONOMY 

person  is  one  who  has  an  extreme  preference  for  self  as  com- 
pared with  others,  and  whose  interest  in  other  people  does  not 
extend  beyond  a  rather  narrow  circle  of  relatives,  friends,  and 
neighbors.  An  extremely  benevolent  person  is  one  who  has 
only  a  mild  preference  for  self  as  compared  with  others,  whose 
interest  in  others  extends  to  a  rather  wide  circle  of  relatives, 
friends,  neighbors,  fellow  citizens,  and  many  other  human 
beings,  and  who  even  includes  some  of  the  kindly  animals  in 
the  circle  of  his  care  and  protection.  To  prefer  the  satis- 
faction which  the  expenditure  of  a  dollar  on  charity  gives  me 
to  the  satisfaction  which  it  would  give  me  in  the  gratification 
of  my  own  palate  does  not  mean  that  I  have  a  deeper  inter- 
rest  in  the  receiver  of  my  charity  than  I  have  in  myself.  If 
I  spent  the  dollar  upon  myself,  it  might  supply  only  a  trifling 
need  or  gratify  a  mere  whim  or  caprice,  because  I  have  spent 
so  many  other  dollars  on  myself  as  to  have  supplied  all  my 
principal  needs.  But  when  it  is  spent  in  charity,  it  may 
supply  a  vital  need  of  someone  else.  If  I  were  in  exactly  as 
great  need  as  he  of  the  objects  which  my  last  dollar  would  pur- 
chase, and  I  then  gave  him  my  dollar,  that  would  show  that 
I  appreciated  his  interest  as  highly  as  my  own,  or  even  more 
highly  than  my  own.  If  there  are  a  number  of  people  in 
whom  I  am  so  deeply  interested  as  to  be  willing  to  sacrifice 
myself  even  to  a  slight  extent,  I  should  pass  for  a  fairly 
generous  man.  But  while  I  am  writing  this  I  am  fully  con- 
scious of  the  fact  that  there  are  people  in  various  parts  of 
the  world  who  are  suffering  from  hunger,  cold,  and  sickness. 
Yet  I  sit  comfortably  in  my  room  instead  of  going  out  to 
find  them  and  share  my  last  dollar  with  them.  They  are  so 
far  away  in  space,  or  they  are  so  far  removed  from  myself  in 
race,  language,  religion,  or  color  that  I  cannot  cudgel  myself 
into  caring  as  much  for  their  comfort  as  I  do  for  my  own.  If 
they  were  near  neighbors,  near  relatives,  I  would  take  a  deep 
interest  in  them.  Will  the  reader  ask  himself  if  he  is  not  in 
about  the  same  condition  ? 


SELF-INTEREST  25 

The  way  in  which  I  appreciate  an  income  for  myself  more 
than  I  appreciate  an  income  for  someone  else  may  be  illus- 
trated by  means  of  the  diagrams  below : 


Y 


Y 


E    E'    E'1  E  E'  w  E 

Diagram  A  Diagram  B  Diagram  C 

A's  appreciation  of  his  A's  appreciation  of  B's  A's  appreciation  of  C's 


own  income 


In  Diagram  A,  let  us  measure  the  income  of  a  certain  man, 
whom  we  shall  call  A,  along  the  line  OX,  and  his  appreciation 
of,  or  interest  in,  each  dollar  of  his  income,  along  the  line  OY. 
Thus,  if  his  income  is  equal  to  the  line  OE,  his  interest  in  each 
dollar  is  measured,  let  us  say,  by  the  line  DE.  But  as  his  income 
increases,  each  dollar  becomes  a  matter  of  less  consequence 
to  him.  He  could  spare  it  with  less  real  sacrifice,  because, 
having  so  many  other  dollars,  he  can  still  supply  himself  with 
all  the  necessaries  of  life  and  some  unnecessary  things  besides. 
In  other  words,  if  we  assume  that  his  income  increases  from 
a  quantity  measured  by  the  line  OE  to  a  quantity  measured  by 
the  line  OE' ,  then  his  interest  in  each  dollar  will  decline  from 
an  intensity  measured  by  the  line  DE  to  an  intensity  measured 
by  D'E' .  Another  increase,  say  to  the  line  OE",  would  bring 
another  fall  in  his  appreciation,  or  interest,  say  to  the  line 
D"E".  From  these  assumptions  we  may  derive  the  curve 
YDD'D"  to  indicate  his  appreciation  of,  or  interest  in,  each 
dollar  of  his  income. 

Another  way  of  stating  the  case  is  as  follows  :  Assuming 
that  his  income  is  measured  by  the  line  OE" ,  to  give  up  one 
dollar  of  his  income  would  cause  him  a  sacrifice  measured  by  the 
line  D"E" .  He  would  merely  have  to  give  up  some  unimpor- 
tant luxury  for  which  he  does  not  care  very  much.  If  he  were 
to  keep  on  giving  until  there  remained  an  amount  measured 


26  PRINCIPLES  OF  POLITICAL  ECONOMY 

by  the  line  OE',  he  would  have  deprived  himself  of  more  and 
more  important  things,  or  of  things  for  which  he  cared  more 
and  more.  To  give  away  still  another  dollar  would  cost  him 
a  sacrifice  measured  by  the  line  D'E'.  If  now  he  keeps  on 
giving  until  there  is  left  only  an  amount  equal  to  OE,  he  will 
be  cutting  so  deeply  into  his  own  needs  that  each  dollar  given 
away  would  deprive  him  of  something  very  important  to  his 
own  well-being,  and  would  occasion  him  a  sacrifice  measured 
by  the  line  DE. 

Interest  in  those  near  to  self.  But  this  man  has  an  inter- 
est in  someone  else  and  is  genuinely  desirous  of  seeing  that 
other  person  comfortable  and  happy.  In  case  that  other  person 
is  peculiarly  dear  to  him,  his  appreciation  of  that  person's  in- 
come might  be  quite  as  high  as  his  appreciation  of  his  own. 
In  that  case  the  same  curve,  YDD'D"  in  Diagram  A,  would 
represent  his  appreciation  of  the  other  person's  income.  But 
he  will  not  feel  so  deep  an  interest  in  very  many  people.  After 
you  get  beyond  the  members  of  his  immediate  family  and  a 
few  intimate  friends,  if  he  is  a  generous  man,  and  even  before 
that  if  he  is  a  selfish  man,  you  will  find  people  in  whom  he 
has  no  such  intense  interest.  In  this  case  his  appreciation  of 
the  importance  of  an  income  to  that  other  person  will  be 
represented  by  Diagram  B. 

In  Diagram  B  we  will  measure  the  income  of  the  other 
person,  whom  we  shall  call  B,  along  the  line  OX,  and  A's 
appreciation  of  B's  income  along  the  line  OY.  If  B's  income  is 
very  small,  measured,  let  us  say,  by  the  line  OE,  A  will  desire 
to  see  that  income  increased.  The  intensity  of  that  desire  of 
A  is  measured,  let  us  say,  by  the  line  DE.  If  now  A's  income 
is  measured  in  Diagram  A  by  the  line  OE",  he  will  be  willing 
to  give  up  a  part  of  his  own  income  in  order  to  add  to  B's 
income.  The  line  DE  in  Diagram  B  is  longer  than  the  line 
D"E"  in  Diagram  A. 

This  kind  of  giving  is  quite  consistent  with  the  fact  that 
A  cares  a  great  deal  more  for  himself  than  he  does  for  B. 


SELF-INTEREST  27 

The  relative  height  of  the  two  curves  YDD'D"  in  Diagram  A 
and  YDD'  in  Diagram  B  indicates  the  degree  of  preference 
for  himself.  Under  the  conditions  represented  in  the  two  dia- 
grams, A  will  by  no  means  divide  evenly  with  B.  That  is  to 
say,  he  will  not  cut  his  own  income  down  from  an  amount 
measured  by  OE"  to  an  amount  measured  by  OE  in  Diagram  A, 
in  order  to  increase  B's  income  to  an  amount  measured  by  OE 
in  Diagram  B.  That  would  give  them  equal  incomes  ;  but  A's 
enjoyment  of  the  last  dollar  of  B's  enlarged  income  would  be 
measured  by  the  line  D'E'  in  Diagram  B,  while  if  he  had  kept 
that  dollar  for  himself,  his  enjoyment  of  it  would  have  been 
measured  by  the  line  DE  in  Diagram  A. 

Interest  in  others  who  are  not  so  near  to  self.  When  it 
comes  to  some  other  person,  whom  we  shall  call  C,  who  is  so 
distantly  removed  from  A  in  space  or  in  kinship  that  A  takes 
very  little  interest  in  him,  we  may  find  that  A's  interest  is 
represented  by  the  curve  YD  in  Diagram  C.  Applying  the 
same  comparisons  between  Diagrams  A  and  C  that  were  made 
between  Diagrams  A  and  B,  we  shall  find  that  A  might  give 
up  a  dollar  to  keep  C  from  starvation,  if  C's  condition  were 
presented  to  him  pretty  strongly,  but  that  is  about  as  far  as  A 
will  go  in  relieving  C's  distress. 

Under  the  conditions  that  we  have  described,  A  would  pass 
as  a  very  benevolent  man.  If  he  were  what  is  ordinarily  re- 
garded as  a  selfish  man,  the  curves  YDD'  in  Diagram  B  and 
YD  in  Diagram  C  would  merely  be  somewhat  lower  than  we 
have  drawn  them,  or  the  curve  YDD 'D"  in  Diagram  A  would 
be  higher  than  we  have  drawn  it. 

Nearness  in  kinship.  Even  though  a  generous  man  will 
care  a  great  deal  for  the  interests  of  a  great  many  other  people, 
nevertheless  he  is  somewhat  self-centered  in  his  appreciation 
of  or  interest  in  others.  He  will  care  more  for  some  people 
than  for  others,  —  more,  for  example,  for  his  own  wife  and 
children  than  for  other  men's  wives  and  children,  more  for 
his  own  relatives  than  for  other  people's  relatives,  more  for  his 


28  PRINCIPLES  OF  POLITICAL  ECONOMY 

own  neighbors  than  for  other  people's  neighbors,  more  for 
his  own  fellow  citizens  than  for  the  citizens  of  other  countries. 
Those  for  whom  he  cares  most,  or  whose  interests  he  feels 
most  keenly,  are  those  who  are  in  some  way  closely  associated 
with  himself.  They  are  near  to  him,  if  we  may  be  per- 
mitted to  use  the  word  near  in  several  senses  besides  the 
geometrical  or  geographical  sense.  They  may  be  near  to  him 
in  point  of  kinship.  Thus,  other  things  equal,  he  will  be  more 
generous  toward  his  near  of  kin  than  toward  those  who  are 
distantly  related  to  him,  toward  human  beings  than  toward 
animals,  and  more  toward  the  higher  than  toward  the  lower 
animals.  Again,  mere  geometrical  nearness  counts  as  a  factor. 
A  man  who  is  suffering  at  his  door  or  in  his  immediate 
neighborhood  will  move  him  more  than  a  man  who  is  suffer- 
ing equally  but  who  is  a  long  way  off.  This  may  sometimes 
be  a  stronger  factor  than  nearness  of  kinship.  That  is,  a  near 
neighbor  who  needs  help  will  appeal  more  powerfully  to  his 
sympathy  than  a  near  relative  who  lives  a  long  way  off.  He 
may  even  do  more  for  an  animal  with  whom  he  is  closely 
associated,  such  as  a  favorite  horse,  dog,  or  cat,  than  for  some 
human  being  who  is  far  away.  Space  is  almost  as  important 
a  factor  as  kinship  in  limiting  his  interests. 

Nearness  in  time  as  well  as  in  space.  Time  is  also  a  factor. 
Our  generous  man  is  more  interested  in  his  immediate  chil- 
dren than  in  his  distant  descendants,  more  in  his  contemporary 
fellow  citizens  than  in  future  generations.  He  is  more  interested 
even  in  his  own  present  wants  than  in  his  future  wants.1 

There  are  other  senses  than  space,  kinship,  and  time  in 
which  the  word  near  can  be  used.  There  are  those  who 
are  near  in  the  sense  of  like-mindedness.  They  who  think 
and  feel  on  most  important  questions  as  he  thinks  and  feels, 
may  be  said  to  be  near  him  in  a  very  important  sense.  He  is 
pretty  certain  to  care  more  for  them,  other  things  equal,  than 
for  those  who  think  and  feel  differently.  This  may  sometimes 
1  Cf.  Chapter  XXXV,  on  The  Source  of  Interest 


SELF-INTEREST 


29 


S' 


G' 


prove  so  strong  a  tie  as  to  cause  him  to  desert  not  only  his 
neighbors  and  fellow  citizens,  but  even  his  family,  in  order  to 
take  sides  with  those  who  think  and  feel  as  he  does. 

In  short,  a  man's  interest  in  others  is  limited  by  the  factor 
of  distance  in  space,  time,  or  kinship,  and  in  unlikeness,  either 
physical,  moral,  or  mental.  The  greater  the  distance  which 
separates  them  from 
him  in  any  or  all 
of  these  respects, 
the  less  his  interest 
in  them  tends  to 
become ;  while  the 
nearer  they  are  to 
him  in  any  or  all 
of  these  respects, 
the  more  intense  his 
interest  in  them  tends  to  become.  He  is  thus  self-centered  in 
his  appreciation  of  the  interest  of  others  even  when  he  is 
broadly  generous.  When  he  is  narrowly  selfish,  he  is  more 
narrowly  self -centered. 

Self-centered  appreciation.  This  principle  of  self-centered 
appreciation  may  be  illustrated  by  the  diagram  above. 

Let  us  assume  that  the  individual's  appreciation  of  the 
interests  of  various  persons,  including  himself,  is  measured 
along  the  line  O  Y.  Then  let  us  assume  that  he  himself  stands 
at  the  point  O,  while  others  are  ranged  along  the  line  OX  in 
the  order  of  their  nearness  to  himself  in  some  of  the 
senses  in  which  we  have  used  the  word  nearness.  Let  us 
take  kinship,  for  example.  Those  nearest  of  kin  would  stand 
on  the  line  OX  nearest  to  the  point  O,  and  those  most  distantly 
related  near  the  opposite  end,  or  the  point  X.  We  will  now 
let  the  curve  SS'  represent  the  selfish  man's  appreciation  of  the 
interests  of  various  persons.  The  line  OS  measures  his  appre- 
ciation of  his  own  interest,  or  his  interest  in  himself.  His 
appreciation  of  the  interests  of  another  person  is  measured  by 


30  PRINCIPLES  OF  POLITICAL  ECONOMY 

the  perpendicular  distance  from  the  point  on  the  line  OX  where 
that  person  stands  to  a  point  on  the  line  SS' .  Thus  his  appre- 
ciation of  the  interests  of  his  immediate  family  may  be  almost 
as  high  as  his  appreciation  of  his  own  interest.  But  he  cares 
so  little  for  other  people,  and  those  for  whom  he  cares  even 
a  little  are  so  few  in  number,  that  the  curve  SS'  falls  very 
rapidly.  Distant  relatives  who  stand  beyond  the  point  Sf  on 
the  line  OX  do  not  concern  him  in  the  slightest  degree.  He 
has  no  appreciation  at  all  of  their  interests. 

In  the  case  of  G,  who  is  a  generous  man,  the  curve  is 
different.  It  is  represented  by  the  curve  GG' .  Following  the 
same  explanation  as  was  given  of  the  curve  SS',  we  find  that 
the  curve  GG'  represents  him  as  caring  a  little  more  for  a  very 
few  persons  than  for  himself.  Then  his  interest  in  others 
begins  to  decline  the  farther  they  are  from  himself,  until,  when 
we  find  some  who  are  so  far  removed  as  to  stand  beyond  the 
point  G'  on  the  line  OX,  his  interest  in  them  disappears 
altogether. 

Any  being  who  did  not  show  such  preferences  as  these 
would  scarcely  be  human.  He  who  would  not  sacrifice  a  trifle 
even  to  save  the  life  of  his  nearest  of  kin,  or  his  nearest 
neighbor,  would  not  be  a  man  but  a  devil.  Again,  he  who 
would  not  show  more  interest  in  his  near  of  kin  than  in  his 
distant  of  kin,  in  his  near  neighbors  than  in  his  distant 
neighbors,  in  his  fellow  citizens  than  in  the  citizens  of  other 
countries,  in  kindly  disposed  men  than  in  evil-minded  men, 
in  men  than  in  animals,  or  in  the  higher  than  in  the  lower 
animals,  would  not  be  much  better  than  a  devil.  If,  in  a  strug- 
gle between  a  man  and  a  tiger  or  a  man  and  a  disease  germ, 
he  did  not  show  some  disposition  to  favor  the  man,  or  if  in 
the  struggle  between  a  good  man  and  a  criminal  he  did  not 
show  a  preference  for  the  good  man,  we  should  probably  call 
him  by  some  pretty  hard  names.  Zeus  alone  among  the  gods 
has  been  represented  to  us  as  showing  no  preference  for 
either  the  Greeks  or  the  Trojans  in  their  memorable  struggle. 


SELF-INTEREST  31 

All  the  lesser  gods  showed  preference  and  took  sides,  but  he 
maintained  an  attitude  of  supreme  indifference  to  the  petty 
quarrels  of  mortal  men.  If  you  will  try  to  appraise  his  morals, 
you  may  find  some  difficulty  in  deciding  whether  they  were 
godlike  or  devilish.  They  certainly  were  not  human. 

Does  it  work  well  to  be  self -centered  ?  We  come  now  to  the 
second  of  the  questions  stated  at  the  beginning  of  this  chapter. 
Does  it  work  well  or  badly  for  the  individual  to  show  self- 
interest  or  to  be  self-centered  in  his  appreciation  of  human 
interests  ?  No  one  is  likely  to  deny  that  he  should  show  a 
preference  for  human  beings  as  compared  with  other  creatures. 
We  hear  a  few  vague  suggestions  now  and  then  to  the  effect 
that  each  one  should  be  a  friend  to  man  and  that  he  should 
not  show  preference  for  special  groups  or  classes  of  men. 
Aside  from  the  vagueness  of  the  idea  of  friendship  to  man 
there  are  one  or  two  difficulties.  Suppose  you  found  a  person 
who  was  not  a  friend  but  an  enemy  to  man,  should  you  befriend 
him  or  not  ?  If  you  befriend  an  enemy  of  man,  are  you  your- 
self a  very  good  friend  to  man  ?  In  order  to  befriend  man 
must  you  not  be  an  enemy  to  the  enemies  of  man  ?  If  so, 
you  must  discriminate  and  show  a  preference  for  the  friends 
of  man  as  against  the  enemies  of  man.  In  other  words,  you 
must  divide  men  into  at  least  two  classes,  namely,  the  friends 
and  the  enemies  of  man,  and  show  more  regard  for  and 
interest  in  one  class  than  in  the  other.  In  the  case  of  the 
average  individual  these  classes  resolve  themselves  into  those 
whom  he  approves,  on  the  one  hand,  and  those  whom  he 
disapproves,  on  the  other.  If  he  is  wise  in  his  approvals  and 
disapprovals,  this  will  probably  work  well.  He  lends  his 
encouragement  and  strength  to  those  who  pass  it  on,  —  who 
use  the  strength  which  they  receive  from  his  friendship  in 
doing  good  rather  than  evil.  Thus  the  giver  does  more  good 
than  he  would  if  he  gave  his  encouragement  and  strength  to 
evil  men  and  good  men  alike.  He  should  show  at  least  that 
degree  of  preference  for  some  men  as  against  others. 


32  PRINCIPLES  OF  POLITICAL  ECONOMY 

Preferring  some  people  to  others.  But,  granting  that  one 
may  be  justified  in  showing  a  preference  for  good  as  compared 
with  bad  men,  is  one  justified  in  showing  a  preference  either 
for  himself  or  for  those  who  are  near  to  him  in  any  of  the 
senses  which  we  have  been  discussing,  that  is,  for  his  family 
or  his  neighbors  as  compared  with  others  outside  those  circles  ? 
There  is  something  to  be  said  in  the  affirmative,  provided  the 
preferences  are  not  too  extreme.  Volumes  have  been  written 
on  this  and  similar  problems,  and  doubtless  many  more  will 
be  written.  The  affirmative  argument  may  be  briefly  stated  in 
the  form  of  a  series  of  propositions : 

1.  Who  ought  to  look  after  and  safeguard  each  interest? 
Every  interest  ought  to  be  safeguarded  and  provided  for  by 
the  person  who  can  do  so  most  effectively.    National  or  social 
welfare  consists  in  the  most  complete  satisfaction  of  all  the 
interests  of  all  the  people.    The  more  fully  and  completely 
every  interest  is  safeguarded  and  provided  for,  the  greater  the 
prosperity  and  welfare  of  the  whole  group.    Therefore,  when 
each  and  every  interest  is  looked  after  by  that  particular  per- 
son who  can  look  after  it  most  thoroughly  and  successfully, 
the  social  welfare  will  be  greater  than  it  would  be  if  some 
interests  were  looked  after  by  persons  who  were  not  best 
fitted  to  do  so. 

2.  Generally  speaking,  but  with  a  few  exceptions,  each  and 
every  interest  can  be  safeguarded  and  looked  after  by  that 
person  who  knows  and  understands  it  most  intimately.    Jones 
probably  knows  his  own  interests  better  than  he  knows  those 
of  Smith.    If  so,  he  can  usually  look  after  his  own  interests 
more  effectively  than  he  can  attend  to  those  of  Smith.    Like- 
wise, and  for  the  same  reasons,  Smith  can  look  after  his  own 
interests  better  than  he  can  those  of  Jones.    Under  these  cir- 
cumstances the  interests  of   both   Jones   and  Smith  will  be 
looked  after  better  if  each  looks  after  his  own  than  if  each 
looked  after  the  other's.    However,  there  may  be  exceptions 
to  this  rule.    Jones  may  know  his  own  interests  better  than 


SELF-INTEREST  33 

Smith,  but  may  be  in  some  unfortunate  condition  which 
renders  him  unable  to  look  after  them.  In  such  a  case,  even 
though  Jones  does  know  his  own  interests  better  than  Smith, 
Smith  may  nevertheless  be  able  to  look  after  them  better  than 
Jones  can.  In  such  a  case  it  would  promote  the  prosperity  of 
that  community  of  two  if  Smith  would  spend  a  part  of  his 
time  looking  after  Jones's  interests.  However,  as  soon  as 
Jones  recovers  from  his  incapacity,  it  will  be  better  for  both 
if  they  return  to  their  normal  habits  and  each  looks  after 
his  own  interests. 

3 .  Who  knows  each  interest  most  completely  f    Generally 
speaking,  but  with  a  few  exceptions,  the  individual  of  mature 
years  and  sound  mind  knows  his  own  interests  more  intimately 
than  other  people  know  them,  and  also  more  intimately  than 
he  knows  the  interests  of  other  people.    Young  children,  of 
course,  do  not  know  their  interests  as  well  as  these  are  known 
by  their  elders  ;  nor  do  persons  of  unsound  mind  know  their 
interests  as  well  as  these  are  known  by  individuals  of  sound 
mind.    Occasionally  a  mature  person  of  sound  mind  may  be 
mistaken  in  his  judgment  as  to  his  own  interests,  and  some 
exceptionally  wise   friends  may  know  them  better   than   the 
person  himself  does.    In  all  these  cases  there  are  excellent 
reasons  why  wiser  persons  should  take  a  great  deal  of  interest 
in  the  affairs  of  those  less  wise  than  they ;  but  it  is  well  not  to 
be  too  hasty  in  assuming  that  you  are  wise  enough  to  look 
after  the  interests  of  a  mature  person  of  sound  mind  better 
than  he  can  do  it  himself. 

4.  Generally    speaking,    but    with    a    few    exceptions,    the 
individual  knows  the  interests  of  his  near  of  kin  better  than 
he  knows  those  of  his  distant  of  kin,  of  his  fellow  citizens 
better  than  those  of  citizens  of  other  countries,  of  members  of 
his  own  race  better  than  of  members  of  other  races.    He  is  in 
much  more  intimate  contact  with  the  members  of  his  immediate 
family  than  with  others,  and,  even  aside  from  all  questions 
of  affection,  he  can  gauge  their  desires  and  understand  their 


34  PRINCIPLES  OF  POLITICAL  ECONOMY 

needs  better  than  he  can  the  desires  and  needs  of  those  with 
whom  he  is  not  so  intimately  associated.  That  is  a  sufficient 
reason  why,  in  the  economy  of  nature,  he  should  care  more  for 
them  than  for  others.  If  he  were  driven  by  his  affections  to  try 
to  care  for  those  whom  he  did  not  understand,  while  neglecting 
those  whom  he  did  understand,  he  would  bungle  much  more 
than  he  does.  Therefore  nature  is  wise  in  so  ordering  things 
that  affection  and  understanding  normally  go  together. 

5.  Generally  speaking,  but  with  a  few  exceptions,  the  indi- 
vidual knows  the  interests  of  his  near  neighbors  more  inti- 
mately than  he  knows  those  of  his  distant  neighbors.    Here 
again  it  is  a  wise  provision  that  friendship  and  understanding 
go  together. 

6.  Whom  can  we  reach  with  the  least  waste  of  energy? 
Generally  speaking,  but  with  a  few  exceptions,  the  individual 
can  reach  his  near  neighbors  with  less  effort  and  waste  of 
energy  than  he  can  reach  his  distant  neighbors.    It  is  wise, 
again,  that  neighborly  feeling  develops  where  there  is  the  most 
power  to  help.    If  each  man  neglected  his  near  neighbors  and 
attempted  to  look  after  his  distant  neighbors,  while  their  near 
neighbors  in  turn  neglected  them  and  tried  to  look  after  their 
distant  neighbors,  there  would  be  much  working  at  cross  pur- 
poses, and  much  energy  would  be  wasted  because  each  tried 
to  do  that  which  he  was  not  well  situated  for  doing,  while 
neglecting  the  work  which  he  was  well  situated  for  doing. 

In  conclusion,  it  is  pretty  clear  that,  as  a  general  rule,  a 
community  in  which  each  individual  works  effectively,  looking 
after  those  interests  which  he  can  look  after  most  success- 
fully and  with  least  waste  of  effort,  is  better  than  one  in 
which  each  individual  works  ineffectively,  trying  to  look  after 
interests  which  he  can  look  after  less  successfully  and  with 
greater  waste  of  effort.  Since  each  individual  knows  his  own 
interests  and  the  interests  of  those  nearest  him  better  than  he 
knows  the  interests  of  those  farther  away,  we  must  justify  at 
least  a  moderate  amount  of  self-preference,  or  self-centered 


SELF-INTEREST  35 

appreciation  of  the  interests  of  others.  But  it  is  difficult  to 
tell  just  how  far  this  rule  should  be  carried.  When  communi- 
cation and  transportation  were  very  difficult,  the  obstacles  in 
the  way  of  helping  people  who  were  a  long  way  off  would 
have  made  it  very  wasteful  to  try  to  do  very  much  for  them. 
Only  one's  near  neighbors  could  be  helped  effectively ;  and 
other  people  outside  that  circle  had  to  be  left  to  their  near 
neighbors,  if  they  could  not  look  after  themselves.  Now  that 
the  obstacle  of  distance  is  not  so  great,  it  would  seem  to  be 
economical  to  widen  one's  geographical  neighborhood  somewhat. 
Harnessing  self-interest  to  public  uses.  Law  and  govern- 
ment can  do  little  or  nothing  toward  eliminating  self-interest, 
even  if  it  were  desirable  to  do  so,  which  it  is  not ;  but  it  is 
possible  to  harness  it  to  the  good  of  the  nation.  Assuming 
that  a  man  will  try  hard  to  promote  his  own  interests  and  the 
interests  of  those  nearest  to  him,  it  is  only  necessary  to  confine 
his  efforts  to  the  field  of  usefulness  or  productivity.  If  he  is 
never  allowed  to  rob,  steal,  or  do  any  injurious  act  in  trying 
to  promote  his  own  interest,  but  is  told  that  he  will  be  per- 
mitted to  do  anything  useful  and  receive  pay  for  it,  or  to  pro- 
duce some  desirable  product  and  sell  it,  he  will  then  have  a  very 
strong  reason  for  doing  useful  things  or  producing  desirable 
objects.  If  a  desirable  object  is  produced,  not  because  the  pro- 
ducer has  a  benevolent  interest  in  the  consumer,  but  because 
he  has  a  selfish  interest  in  the  price  which  he  can  get  for  it, 
it  will  do  the  consumer  just  as  much  good  as  though  it  were 
produced  for  benevolent  reasons.  When  everyone  is  driven 
by  self-interest  to  produce  as  much  as  he  can  or  render  as 
good  service  as  he  can,  there  will  be  a  great  deal  produced 
and  much  good  service  rendered.  Therefore,  even  if  one  did 
not  approve  of  any  degree  of  self-interest  whatever,  one  might 
consistently  admit  that  the  law  was  making  the  very  best  of  a 
bad  situation  by  thus  harnessing  that  powerful  motive  to  use- 
ful service  and  productive  work.  Seeing  that  the  law  could 
not  possibly  transform  self-interested  persons  into  benevolent 


36  PRINCIPLES  OF  POLITICAL  ECONOMY 

persons,  the  next  best  thing  would  certainly  be  to  hedge  them 
about  so  as  to  make  it  impossible  for  them  to  pursue  their  own 
self-interest  in  any  except  useful  and  productive  lines. 

No  visible  harmony  of  human  interests.  This  does  not 
assume  that  there  is  any  such  thing  as  a  natural  harmony  of 
human  interests.  If  anything  is  clear,  it  is  that  human  inter- 
ests are  frequently  in  conflict.  Unless  there  is  an  umpire  or 
a  tribunal  to  decide  these  questions  of  conflict,  an  overdevel- 
oped self-interest  will  frequently  drive  men  into  actual  con- 
flict, or  lead  one  to  do  something  in  his  own  interest  which 
would  be  injurious  to  others.  It  is  one  of  the  functions  of  law 
and  government  to  adjudicate  these  conflicts,  and  also  to  for- 
bid, with  suitable  penalties,  any  injurious  act.  When  the  laws 
are  intelligently  framed  and  rigidly  executed,  this  leaves  the 
individual  no  choice.  However  self-interested  he  may  be,  and 
however  indifferent  he  may  be  to  the  interests  of  others,  he 
must  seek  his  self-interest  by  useful  rather  than  by  injurious 
acts.  When  he  is  thus  efficiently  controlled,  the  more  intense 
his  self-interest  becomes,  and  the  more  intense  his  interest  in 
his  family  or  near  friends,  the  more  intensely  he  will  strive  to 
do  useful  things,  not  because  he  wants  to  be  useful,  but  because 
he  wants  the  reward  of  usefulness.  To  harness  this  powerful 
motive  of  self-interest  to  the  kinds  of  work  which  benefit  the 
nation  —  which  increase  wealth  and  prosperity  —  is  like  har- 
nessing a  great  natural  force  like  steam  or  electricity.  In  the 
one  case  the  harness  consists  of  laws  and  regulations ;  in  the 
other  it  consists  of  mechanical  devices. 


CHAPTER  IV 


COMPETITION 

The  struggle  for  existence.  It  is  a  common  error  to  speak 
of  competition  as  though  it  were  synonymous  with  war  or  with 
the  struggle  for  existence  as  it  is  carried  on  among  brutes. 
That  it  is  a  form  of  conflict  there  can  be  no  doubt,  nor  can 
it  be  denied  that  it  is  a  phase  of  the  all-but-universal  struggle  for 
existence.  But  there  are  many  forms  of  conflict  besides  war, 
and  there  are  many  ways  of  struggling  for  existence  without 
resorting  to  the  destructive  methods  of  brutes.  The  forms  of 
conflict,  or  the  methods  of  struggling  for  existence,  may  be 
classified  as  follows  : 

War 

Robbery 

Dueling 

Sabotage 

Brawling 

Thieving 
Swindling 

Adulteration  of  goods 
False  advertising 


METHODS  OF 
STRUGGLING 

FOR 
EXISTENCE 


Destructive 


Deceptive 


Persuasive 


f  Courting  for  royal  favors 
Political  -!  Courting  the  sovereign  people 
[  Campaigning  for  office 

f  Polite  social  intercourse 
Erotic  -{  „ 

(^  Courting 


Commercial 


Productive 


Advertising 
Salesmanship 

"  Leaving  it  to  the  crowd  " 
Litigation  before  courts 

f  Rivalry  in  producing  goods 
\  Rivalry  in  rendering  service 

37 


38  PRINCIPLES  OF  POLITICAL  ECONOMY 

Various  forms  of  conflict.  The  methods  named  in  the  fore- 
going outline  may  be  explained  and  illustrated  as  follows : 
By  destructive  methods  are  meant  all  those  whereby  one  suc- 
ceeds by  virtue  of  one's  power  to  kill,  to  hurt,  or  to  inspire 
fear  of  physical  injury  or  pain.  War,  robbery,  dueling,  sabo- 
tage, and  brawling  are  names  for  methods  of  destruction  as 
carried  on  by  human  beings ;  but  it  must  be  remembered 
that  animals  also  kill,  rob,  inflict  injury,  and  inspire  terror. 
By  the  deceptive  methods  are  meant  all  those  by  which  one 
succeeds  by  virtue  of  one's  power  to  deceive,  to  swindle,  or  to 
cheat.  Animals  practice  deceit,  though  we  do  not  call  their 
forms  of  deceit  by  such  names  as  swindling,  counterfeiting, 
adulteration  of  goods,  etc.  By  the  persuasive  methods  are 
meant  all  those  methods  whereby  one  succeeds  by  virtue  of 
one's  power  to  persuade  or  to  convince.  One  may  beat  one's 
rival  by  being  a  more  persuasive  talker,  whether  one  is  striv- 
ing for  favors  from  the  sovereign  person  or  from  the  sover- 
eign people,  whether  one  is  striving  for  the  hand  of  a  lady, 
the  decision  of  a  jury,  or  the  trade  of  a  possible  customer. 
This  form  of  conflict  would  remain  even  if  we  could  elimi- 
nate all  other  forms.  Even  under  the  most  complete  form  of 
communism  there  would  remain  abundant  room  for  the  per- 
suasive forms  of  conflict.  By  the  productive  methods  are 
meant  all  those  methods  whereby  one  may  beat  one's  rivals, 
or  gain  advantages,  by  virtue  of  one's  power  to  produce,  to 
serve,  or  to  confer  benefit. 

The  same  persons  may  resort  to  more  than  one  of  these 
methods  in  order  to  gain  an  advantage.  When  two  farmers 
compete  in  growing  crops,  they  are  struggling  for  existence,  or 
for  economic  advantage,  by  a  productive  method.  When  they 
quarrel  over  a  line  fence  and  take  their  quarrel  before  a  court 
for  adjudication,  they  are  struggling  by  a  persuasive  method. 
When  they  secretly  alter  or  remove  landmarks  in  order  to  gain 
an  advantage  in  their  litigation,  or  when  they  bribe  jurors,  they 
are  struggling  by  a  deceptive  method.  When  they  fall  to 


COMPETITION  39 

fighting  either  with  fists  or  with  weapons,  they  are  struggling  by 
a  destructive  method.  When  they  change  their  methods  in  the 
order  just  described,  they  are  sinking  lower  and  lower  in  the 
scale ;  that  is,  they  are  resorting  to  worse  and  worse  methods 
of  struggling  for  existence  or  advantage.  When  they  rival  one 
another  in  growing  corn,  there  is  more  corn  grown  as  the  result 
of  that  rivalry.  The  country  is  better  fed  and  everyone  is 
better  off,  except  possibly  the  one  who  is  beaten,  and  even 
he  may  very  likely  be  better  off  than  he  would  have  been  if 
he  had  not  competed  at  all.  When  two  farmers  quarrel  over 
a  line  fence  and  take  it  into  court,  no  one  gains  any  benefit 
except  the  lawyers,  and  what  the  lawyers  gain  the  litigants 
lose.  No  new  land  is  created  by  that  conflict.  No  new  wealth 
is  produced.  The  community  is  no  better  fed,  and  the  liti- 
gants have  wasted  their  time.  To  change  from  persuasion  to 
deception,  or  from  deception  to  physical  force,  is  so  clearly 
to  sink  to  a  lower  level  that  it  is  unnecessary  to  pursue  the 
topic  farther. 

Destructive  and  deceptive  methods  of  brutes.  It  will  be 
apparent  to  anyone  who  will  study  the  diagram  that  among 
animals  the  destructive  and  deceptive  methods  are  the  charac- 
teristic forms  of  struggle.  They  kill,  maim,  injure,  rob,  and 
deceive  one  -another  with  no  moral  or  legal  restraints.  They 
may  sometimes  rise  to  the  level  of  persuasion,  as  in  the 
courting  process,  but  never  to  the  level  of  production  ;  that 
is,  no  animal  ever  tries  to  beat  its  rival  by  producing  a  larger 
or  better  product  or  rendering  a  greater  or  better  service. 
Among  human  beings  who  have  no  moral  sense,  and  who  are 
unrestrained  by  law  and  justice,  the  destructive  and  deceptive 
methods  of  struggle  will  be  followed,  as  well  as  the  persuasive 
and  productive  methods ;  but  the  destructive  and  deceptive 
methods  are  precisely  the  things  that  morals  and  laws  are  de- 
signed to  prevent.  In  any  civilization  worthy  of  the  name, 
and  under  any  government  worthy  to  stand  overnight,  men 
are  actually  restrained  by  their  own  moral  feelings,  by  the 


40  PRINCIPLES  OF  POLITICAL  ECONOMY 

respect  for  the  good  opinions  of  their  fellows,  and  by  the 
fear  of  legal  penalties,  from  attempting  to  promote  their  own 
interests  by  destruction  or  deception. 

Meaning  of  crime.  To  say  that  men  are  restrained  from 
doing  these  things  is  not  the  same  as  to  say  that  they  are 
absolutely  prevented.  Crime  still  flourishes,  but  it  must  be 
remembered  that  what  we  call  crimes  for  human  beings  are 
not  crimes  for  brutes,  for  the  simple  reason  that  brutes  have 
none  of  those  restraints  which  men  throw  around  themselves. 
The  fact  that  we  call  all  destructive  methods,  and  the  more 
grossly  deceptive  methods,  crimes,  and  impose  penalties  against 
them,  shows  that  we  are  trying  to  raise  the  struggle  for  ex- 
istence to  a  higher  plane  than  that  on  which  it  is  waged  in 
the  subhuman  world.  The  aim  is  to  prevent  destruction  and 
deception,  and  to  compel  men  to  succeed,  if  they  succeed  at 
all,  by  persuasion  or  production.  No  government,  however,  is 
so  efficient  that  it  can  prevent  all  destruction  or  deception. 
"  The  mills  of  man  grind  slowly  and  they  grind  exceeding 
coarse."  Besides,  there  are  some  more  or  less  refined  methods 
of  deception  which  have  not  even  been  declared  illegal  by 
legislation.  If  we  can  so  improve  our  legislation  as  to  pro- 
hibit every  form  of  deception  as  well  as  destruction,  and  if 
we  can  so  improve  our  executive  and  judicial  systems  as  to 
prevent  absolutely  the  violation  of  law,  we  shall  have  reached 
the  ideal  of  government  control  over  the  struggle  for  existence. 
To  stop  productive  competition  and  compel  us  all  to  struggle 
for  our  own  advantage  by  the  persuasive  methods  would  be  a 
distinct  step  backward. 

Is  it  wrong  to  compete?  There  are  a  few  people  who  object 
on  principle  to  all  forms  of  competition,  —  who  believe  that 
the  whole  competitive  system  is  morally  wrong.  This  feeling, 
however,  is  probably  due  to  a  failure  to  discriminate,  as  we 
have  tried  to  do  in  the  preceding  pages,  between  different  kinds 
of  conflict.  The  horrors  of  war  and  other  forms  of  destructive 
conflict,  the  petty,  skulking  meanness  which  accompanies  all 


COMPETITION  41 

forms  of  deceptive  conflict,  and  even  the  jealousies  and  heart- 
burnings which  result  from  many  forms  of  persuasive  conflict, 
have  so  impressed  certain  sensitive  spirits  as  to  cause  them  to 
revolt  against  the  very  idea  of  competition  in  any  form.  Such 
people  ought  never  to  play  croquet,  because  there  is  com- 
petition even  there.  An  election  is  as  truly  competitive  as  any 
form  of  business. 

Universality  of  struggle.  During  the  entire  life  of  man  on 
this  planet  he  has  had  to  struggle  in  one  way  or  another. 
The  reason  why  we  are  here  to-day  is  because  our  ancestors 
were  successful  in  their  struggles.  They  succeeded  in  living 
and  reproducing  their  kind  in  spite  of  all  the  enemies  and 
dangers  which  surrounded  them.  One  reason  why  they  strug- 
gled so  successfully  was  that  they  were  valiant  enough  to  wage 
their  fight  with  vigor  and  with  spirit.  That  spirit  we  have  in- 
herited to  such  an  extent  that  we  cannot  even  amuse  ourselves 
without  some  kind  of  competition  or  struggle.  It  is  as  the 
breath  of  life  to  our  nostrils.  It  will  be  well  for  us  if  we  can 
harness  this  spirit  to  productive  work  rather  than  allow  it  to 
waste  itself  in  destruction,  deception,  or  even  in  some  fruitless 
kinds  of  persuasion.  The  nation  which  succeeds  best  in  so  har- 
nessing this  spirit  to  production  is  the  nation  which  should 
normally  grow  rapidly  in  wealth,  prosperity,  and  power. 

Again,  the  great  fact  of  scarcity,  together  with  the  fact, 
pointed  out  in  the  preceding  chapter,  that  we  all  prefer  some 
people  to  others,  makes  some  form  of  competition  inevitable 
and  eternal.  As  pointed  out  in  Chapter  II,  when  there  is 
not  enough  of  a  certain  thing  to  go  around  and  satisfy  every- 
body, all  those  who  prefer  themselves  and  their  own  families 
to  their  rivals  and  their  families  will  struggle  to  get  their  share 
of  the  scarce  article.  When  there  are  not  enough  of  the  high 
offices  to  go  round,  there  will  be  a  similar  struggle  to  get  them. 
These  facts  have  always  been  present  in  human  society  and 
always  must  remain,  from  the  very  nature  of  man  and  of  the 
universe  in  which  he  finds  himself.  From  the  very  nature  of 


42  PRINCIPLES  OF  POLITICAL  ECONOMY 

the  case  we  cannot  all  be  leaders.  If  we  were,  there  would 
be  no  followers.  We  would  all  rather  lead  than  follow ;  we 
would  rather  command  than  obey.  Therefore  we  shall  always 
struggle  for  leadership  and  command.  Nor  can  there  be  wealth 
enough  to  go  around  and  satisfy  everyone.  If  there  were, 
wealth  would  cease  to  exist  as  wealth.  Whenever  you  find 
a  thing  so  abundant  as  that,  it  has  ceased  to  count  as  wealth. 
Only  those  things  are  wealth  of  which  we  can  say  that  more 
is  better  than  less.  So  long  as  we  would  rather  have  more 
of  a  certain  article  than  less  of  it,  we  shall  strive  to  get 
more.  Competition,  or  struggle,  is  therefore  unavoidable.  The 
thing  to  do  is  to  make  the  most  of  it  and  to  turn  it,  so  far  as 
possible,  into  productive  channels  and  out  of  the  destructive 
and  deceptive  channels. 

The  spirit  in  which  one  competes.  In  assuming  the  uni- 
versality and  permanence  of  competition  in  some  form  it  is 
not  necessary  to  exclude  such  things  as  love,  friendship, 
neighborliness,  and  cooperation.  Competitors  in  a  friendly 
game  may  be  none  the  less  friendly  because  they  are  com- 
peting. It  is  only  when  they  care  more  for  victory  or  the 
prize  of  victory  than  they  do  for  friendship  that  there  is  any 
conflict  between  competition  and  friendship.  The  cure  for 
this,  however,  is  not  the  abolition  of  competition,  but  the 
learning  to  care  for  the  right  things  and  to  evaluate  things 
properly.  When  men  care  more  for  money,  which  is  the 
immediate  prize  of  economic  competition  than  for  honor, 
friendship,  or  justice,  then  competition  is  likely  to  be  ruthless 
and  destructive.  When  men  care  more  for  offices,  the  imme- 
diate prize  of  political  competition,  than  for  the  welfare  of  the 
country  or  the  peace  of  the  neighborhood,  a  political  cam- 
paign is  likely  to  become  a  ruthless  and  destructive  game. 
And  when  football  men  care  more  for  victory  than  for  sport 
or  honor,  football  becomes  a  game  unfit  for  gentlemen.  In  all 
these  cases  the  evil  does  not  inhere  in  competition  itself  but  in 
the  false  system  of  valuations  in  the  minds  of  the  competitors. 


COMPETITION  43 

So  long  as  business  men  realize  that  there  are  other  things 
more  precious  than  money,  so  long  as  politicians  realize  that 
there  are  other  things  more  important  than  winning  offices,  so 
long  as  football  men  realize  that  there  are  other  things  greater 
than  victory,  all  these  forms  of  competition  are  thoroughly 
compatible  with  the  most  sincere  friendship. 

It  has  been  pointed  out  many  times  that  the  struggle  for 
the  life  of  others  is  just  as  real  a  fact  in  life  as  the  struggle 
for  the  life  of  self,  that  mutual  aid  is  as  real  as  mutual 
antagonism,  and  that  cooperation  has  a  place  in  our  economic 
system  as  well  as  competition.  All  this  is  true,  but  it  must 
not  be  allowed  to  obscure  the  fact  that  competition  is  a  very 
real  thing  also.  Back  of  these  apparent  contradictions  lies  the 
very  important  fact  that  human  interests  are  sometimes  har- 
monious, and  sometimes  antagonistic,  —  that  they  are  never 
wholly  one  or  the  other.  Where  the  interests  of  men  har- 
monize, there  is  and  always  will  be  cooperation,  provided  they 
are  wise  enough  to  understand  it ;  where  their  interests 
conflict,  there  is  and  always  will  be  competition. 

Cooperation  a  form  of  competition.  Even  cooperation,  as  it 
is  generally  practiced,  is  only  a  method  of  competing  more 
effectively.  There  is  cooperation  among  the  members  of  an 
athletic  team.  Their  teamwork  consists  in  working  together 
smoothly  and  effectively,  but  the  purpose  of  this  teamwork, 
or  cooperation,  is  to  enable  them  to  compete  more  effectively 
against  the  opposing  team.  It  would  be  difficult  to  find  or  to 
name  an  instance  of  cooperation  which  did  not,  directly  or  in- 
directly, enable  the  cooperators  to  compete  more  successfully 
than  they  were  able  to  do  when  working  alone  as  individuals. 
It  is  really  the  principle  of  teamwork  applied  to  business 
competition.  Within .  the  cooperating  group,  as  within  the 
athletic  team,  competition  among  members  is  reduced.  But  com- 
petition between  cooperating  groups,  or  between  the  group  and 
those  outside  the  group,  is  quite  as  sharp  as  it  would  be  if 
there  were  no  cooperative  groups.  Again,  when  a  cooperative 


44  PRINCIPLES  OF  POLITICAL  ECONOMY 

group  becomes  large,  there  arises  within  the  group  a  certain 
amount  of  competition  for  offices  and  other  advantages. 

Cooperation  is  an  excellent  thing  under  certain  conditions, 
and  wherever  the  conditions  call  for  it,  every  reasonable  effort 
should  be  made  to  encourage  it ;  but  the  encouragement  should 
be  given  with  a  full  understanding  of  its  limitations  and  of  its 
real  relation  to  the  competitive  process.  More  cooperative 
societies  have  failed  than  have  succeeded.  One  of  the  principal 
reasons  for  failure  has  been  that  the  promoters  have  imagined 
that  there  was  in  cooperation  something  inherently  superior  to 
competition,  and  that  it  ought  to  be  substituted  for  competition 
anywhere  and  everywhere.  The  truth  seems  to  be  that  coopera- 
tion is  called  for  only  under  certain  special  conditions  where 
teamwork  is  required  in  order  to  secure  large  results. 

Where  cooperation  is  successful.  A  careful  study  of  coopera- 
tion will  show  that  it  has  seldom  succeeded  in  the  field  of 
production.  Its  chief  successes  have  been  achieved  in  mer- 
chandizing, that  is,  in  buying  and  selling.  Except  among  a 
few  religious  societies,  which  are  held  together  by  a  powerful 
religious  sentiment,  the  author  does  not  know  of  a  single  case 
where  cooperative  farming  has  succeeded.  By  cooperative 
farming  is  meant  the  running  of  the  productive  work  of  grow- 
ing crops  under  a  cooperative  system.  There  are  many  cases, 
however,  in  which  groups  of  farmers  have  cooperated  in  buy- 
ing and  selling,  in  marketing  their  products,  in  purchasing 
their  supplies,  and  in  securing  capital  on  advantageous  terms. 
There  are  also  many  cases  in  which  they  have  cooperated 
in  running  creameries,  cheese  factories,  and  grain  elevators. 
These  are  parts  of  their  marketing  system.  Again,  it  must  be 
remembered  that  the  farmers  do  not  themselves  operate  these 
establishments.  They  own  them  and  they  furnish  the  capital 
to  run  them,  but  they  hire  others  to  manage  them  and  to  do 
the  work.  The  men  who  work  in  these  establishments  are  not 
cooperators,  but  receive  wages  and  salaries  precisely  as  they 
would  if  the  establishments  were  owned  by  private  individuals. 


COMPETITION  45 

Two  fields  for  business  competition.  There  is  a  fundamental 
reason  why  cooperative  enterprises  have  not  flourished  in  the 
field  of  production  as  often  as  they  have  in  the  field  of  buy- 
ing and  selling.  This  reason  is  found  in  the  two  kinds  of 
business  competition,  —  competitive  production  and  competitive 
bargaining.  Competitive  production  always  works  well ;  com- 
petitive bargaining  sometimes  works  well  and  sometimes  works 
badly.  Since  competitive  production  always  works  well,  the 
need  for  cooperative  production  is  never  sufficient  to  justify  its 
existence.  No  one  has  a  sufficiently  strong  motive  to  induce 
him  to  give  his  time  and  energy  to  the  running  of  a  coop- 
erative society  in  the  field  of  production.  Since  there  are 
no  evils  connected  with  competitive  production,  there  is  not 
enough  to  be  gained  by  cooperative  production  to  lead  anyone 
to  sacrifice  his  time  and  effort  in  order  to  make  it  succeed. 

In  the  field  of  competitive  bargaining,  however,  evils  fre- 
quently spring  up.  Where  a  small  and  compact  body  of 
dealers  are  buying  from  a  large  and  widely  scattered  body  of 
producers,  the  latter  are  at  a  great  disadvantage  in  the  bar- 
gaining process.  Where  this  is  the  case  it  is  necessary  for 
the  producers  to  get  together  in  a  cooperative  organization  in 
order  to  bargain  on  equal  terms  with  the  dealers.  Where  there 
is  such  a  need  as  this,  someone  will  have  a  motive  that  is 
sufficiently  strong  to  induce  him  to  give  his  time  and  atten- 
tion, to  sit  up  nights,  to  labor  in  season  and  out  of  season, 
to  keep  the  cooperative  society  together  and  make  it  succeed. 
Without  some  such  motive  as  this,  cooperation  has  seldom 
or  never  succeeded. 

Competitive  consumption.  There  is  another  kind  of  com- 
petition which  always  works  badly.  It  is  even  worse  than 
competitive  bargaining.  It  may  be  called  competitive  con- 
sumption. By  competitive  consumption  is  meant  a  rivalry  in 
display,  in  ostentation,  in  the  effort  to  outshine  or  to  outdress 
all  one's  neighbors,  or  at  least  not  to  be  outshone  or  out- 
dressed  by  them.  This  is  not  business  competition,  however, 


46  PRINCIPLES  OF  POLITICAL  ECONOMY 

though  it  can  be  called  a  kind  of  economic  competition. 
Seeing  that  this  is  the  worst  form  of  competition,  —  a  kind 
which  always  works  badly,  —  it  would  follow  that  the  best  kind 
of  cooperation  would  be  a  kind  which  would  stop  this  process 
of  conspicuous  waste  and  display.  A  few  religious  sects  have 
undertaken  to  do  something  in  this  direction,  but  they  have 
not  been  very  popular.  Vanity  is  apparently  an  even  stronger 
motive  than  greed  itself.  It  is  greed  which  leads  to  the  worst 
evils  of  competitive  bargaining ;  it  is  vanity  which  leads  to  the 
worst  evils  of  competitive  consumption. 

From  what  has  been  said  it  will  appear  that  economic  com- 
petition is  not  synonymous  with  the  productive  methods  of 
struggling  for  existence  as  outlined  in  the  beginning  of  this 
chapter.  There  is  such  a  thing,  it  is  true,  as  competitive  pro- 
duction, but  competitive  bargaining  is  partly  persuasive  and 
partly  deceptive.  It  is  persuasive  when  it  takes  the  form  of 
clever  advertising,  of  expert  salesmanship,  or  of  shrewd  and 
reasonably  honest  bargaining ;  it  is  deceptive  when  cleverness 
in  advertising  takes  the  form  of  artistic  lying  (of  overstating 
the  merits  of  an  article  advertised),  or  when  expert  salesman- 
ship takes  the  same  form.  Competitive  consumption  has  no 
productive  features  about  it.  The  effort  to  keep  up  appear- 
ances, to  dress  better  than  one  can  afford,  to  spend  money  for 
purposes  of  display,  are  all  deceptive,  besides  being  wasteful 
and  to  that  extent  destructive.  These,  however,  are  among 
the  more  refined  and  less  repulsive  forms  of  destruction.  For 
this  reason,  perhaps,  neither  law  nor  public  sentiment  has 
condemned  them  very  definitely  as  yet. 

In  what  fields  cooperation  may  succeed.  They  who  are 
interested  in  promoting  cooperation  should  bear  all  this  in 
mind.  It  is  a  waste  of  time  and  energy  to  try  to  substitute 
cooperation  for  competition  in  all  cases.  In  the  first  place,  it 
cannot  be  done,  because,  so  long  as  people  prefer  themselves 
and  those  who  are  near  them  to  others  who  are  farther  from 
them,  competition  in  some  form  will  exist.  In  the  second 


COMPETITION  47 

place,  even  if  cooperation  could  be  substituted  for  competition, 
it  would  be  undesirable  in  many  cases,  though  desirable  in 
others  ;  that  is  to  say,  there  are  some  cases  in  which  competi- 
tion works  so  well  that  cooperation  could  not  improve  upon  it. 
To  be  more  specific,  competitive  production,  as  stated  before, 
always  works  well.  No  one  has  yet  succeeded  in  making  coop- 
eration in  production,  either  on  a  large  scale  or  on  a  small  scale, 
work  successfully  for  a  long  period  of  time.  This  is  not  saying 
that  producers  may  not  occasionally  cooperate,  as  when  farmers 
help  one  another  in  special  lines  of  work.  In  our  rural  com- 
munities, especially  in  previous  generations,  there  were  many 
barn  raisings,  log  rollings,  corn  huskings,  and  other  examples 
of  genuine  and  beneficial  cooperation.  But  these  events  were 
only  incidents  in  a  kind  of  life  which  remained,  in  spite  of 
them,  predominantly  competitive.  Even  competitive  bargaining 
sometimes  works  well.  Where  this  is  the  case,  nothing  is  to 
be  gained  by  cooperation,  and  it  is  therefore  certain  to  fail, 
because  the  cooperators  will  sooner  or  later  lose  their  enthu- 
siasm, when  they  see  that  they  are  not  gaining  anything  by  it, 
that  is,  when  they  see  that  it  is  not  working  any  better  than 
competition.  The  would-be  cooperators  should  choose  for  their 
field  of  effort  some  situation  where  competitive  bargaining  is 
working  badly.  There  they  will  have  a  chance  of  success. 
But  no  cooperative  scheme  runs  itself.  Even  where  there  is 
a  distinct  and  undoubted  need  for  it,  it  will  succeed  only 
when  some  capable  person  gives  a  great  deal  of  time  and 
study  and  hard  work  to  it. 

Compulsion  versus  voluntary  agreement.  With  an  unerring 
instinct  for  economic  falsehood  a  certain  class  of  writers  have 
persistently  obscured  this  question  of  cooperation  versus  com- 
petition by  confusing  it  with  working  under  compulsion  ver- 
sus working  under  freedom  of  contract.  The  Panama  Canal 
was  not  built  cooperatively.  The  government  of  the  United 
States  decided  to  hire  others  to  do  it  instead  of  bargaining 
with  contractors.  They  who  did  the  work  did  not  cooperate, 


48  PRINCIPLES  OF  POLITICAL  ECONOMY 

any  more  than  the  men  who  build  our  railroads  and  factories 
or  work  on  our  streets.  If  a  large  number  of  farmers  unite 
to  run  a  creamery  or  a  shoe  factory  of  their  own,  but  do 
not  work  in  it  themselves,  they  sometimes  call  it  a  coopera- 
tive creamery  or  shoe  factory.  In  reality  it  is  only  quasi  coop- 
erative. The  people  who  do  the  work  in  the  factory  are 
hired  and  have  no  more  to  say  about  the  management  than 
they  would  have  if  the  factory  were  owned  by  an  ordinary 
joint-stock  corporation.  A  cooperative  shoe  factory,  of  the 
class  which  we  are  now  discussing,  is  merely  an  organization 
formed  for  the  purpose  of  bargaining  for  its  shoes  more  suc- 
cessfully than  it  could  otherwise  do.  It  finds  that  it  can  bar- 
gain directly  with  workingmen,  tanneries,  and  others  to  better 
advantage  than  it  can  bargain  with  private  owners  of  shoe 
factories.  That  is  the  way  in  which  the  Panama  Canal  was 
built.  It  was  found  that  the  government  could  bargain  more 
successfully  with  the  engineers,  directors,  and  workingmen  than 
with  private  contractors.  It  was  as  if  a  private  citizen  who 
was  about  to  build  a  house  should  decide  to  hire  his  own 
workmen  and  foremen  instead  of  bargaining  with  a  contractor. 

It  is  particularly  erroneous  to  speak  of  an  army  as  though 
it  were  a  cooperative  body.  It  works  under  authority  and 
compulsion  rather  than  under  a  system  of  free  contracting. 
Soldiers  do  whatever  they  are  commanded  to  do  and  not  what- 
ever they  see  fit  to  bargain  to  do.  Experience  has  shown  that 
armies  can  succeed  in  no  other  way.  It  has  also  shown  that 
industry  can  succeed  on  the  basis  of  free  contract,  under  which 
no  one  does  anything  until  he  sees  fit  to  contract  to  do  so. 
A  little  military  experience  will  thoroughly  convince  our  people 
that  the  distinction  between  compulsion  and  freedom  is  not  the 
same  as  the  distinction  between  cooperation  and  competition. 

Cooperation  in  setting  standards  of  consumption.  There  is 
always  an  acute  need  for  a  kind  of  cooperation  that  can  stop 
competitive  consumption.  Unfortunately  that  need  is  hot  very 
widely  understood.  One  reason  why  it  costs  us  so  much  to 


COMPETITION  49 

live  is  that  we  are  everlastingly  trying  to  keep  up  with  some- 
one else.  "  It  takes  all  my  income,"  said  a  certain  congressman, 
"to  keep  up  with  my  fool  neighbors."  He  was  expressing 
in  this  picturesque  manner  one  of  the  profound  facts  of  our 
economic  life.1  The  things  which  cost  us  so  much  money  are 
not  the  things  which  we  prize  for  their  own  sakes,  but  the 
things  which  we  feel  that  we  must  have  because  our  neighbors 
have  them.  We  are,  each  of  us,  trying  to  live  up  to  a  stand- 
ard set  by  someone  else.  Rich  and  poor  alike  are  afflicted  by 
the  same  disease.  The  rich  are  doubtless  more  to  blame  than 
the  poor,  but  the  poor  cannot  escape  all  blame.  If  they  would 
try  to  live  rationally,  and  not  try  to  keep  pace  with  someone 
else  a  little  richer  than  themselves,  they  would  not  find  it  so 
hard  to  make  both  ends  meet.  A  little  cooperation  among 
themselves,  in  the  way  of  setting  their  own  standards  of  dress 
and  fashion,  would  be  a  great  help.  If,  likewise,  the  well-to-do 
would  not  try  to  imitate  those  still  richer,  they  could  be  saved 
much  worry  and  vexation  of  spirit.  The  individual  finds  him- 
self almost  helpless.  "  As  well  be  out  of  the  world  as  out  of 
style  "  is  a  saying  which  pretty  well  sums  up  the  situation,  so 
far  as  the  individual  is  concerned.  But  a  large  group  of  people 
who  would  cooperate  in  the  work  of  setting  their  own  styles 
need  not  be  either  out  of  style  or  out  of  the  world.  Educated 
people  who  see  the  principle  involved  should  take  the  lead. 
In  so  doing  they  would  not  only  be  doing  themselves  a  favor, 
but  they  would  be  conferring  a  priceless  benefit  upon  the 
whole  nation. 

1  Compare  also  Mr.  Irving  Bacheller's  book  entitled  "  Keeping  up  with 
Lizzie." 


CHAPTER  V 
LAW  AND  GOVERNMENT 

The  need  for  law.  Law  and  government  have  a  most  im- 
portant part  to  perform  in  promoting  the  prosperity  of  the 
people.  Bagehot1  has  said  that  the  first  great  need  of  primi- 
tive man  is  for  law,  —  definite,  concise  law.  He  even  argued 
that  it  is  more  important  that  the  law  be  definite  and  concise 
than  that  it  be  just,  though  both  are  of  very  great  importance. 
It  is  probable  that  a  system  of  laws  which  are  well  understood 
because  they  are  clear  and  concise,  and  which  are  regularly 
enforced  without  variation  or  favoritism,  even  though  they  are 
in  some  respects  unjust,  is  better  for  a  people  than  a  system 
of  laws  which  are  in  essence  just,  but  which  are  not  clearly 
understood  and  not  regularly  and  impartially  enforced ;  but  of 
course  it  would  be  still  better  if  they  were  both  just,  on  the 
one  hand,  and  clear,  concise,  and  regularly  enforced,  on  the 
other.  When  everyone  knows  definitely  what  the  law  is,  and 
knows  definitely  that  it  will  be  enforced  not  only  against  him 
but  equally  in  his  defense,  he  at  least  knows  what  he  can 
count  upon.  Nothing  so  discourages  industry  and  enterprise 
as  uncertainty  as  to  what  other  men  are  likely  to  do,  and 
uncertainty  as  to  the  enforcement  of  law  contributes  to  that 
uncertainty  as  to  what  other  men  are  likely  to  do. 

The  problem  as  to  what  the  government  can  do,  through  its 
laws  and  its  administration,  for  the  promotion  of  the  economic 
prosperity  of  the  people,  is  of  the  very  greatest  importance. 
The  specific  aim  should  be  to  call  out  the  very  best  and  most 
productive  efforts  of  every  individual.  Since  the  greatest  re- 
source of  any  nation  is  the  productive  energy  of  the  people 

1  Physics  and  Politics,  fifth  edition,  p.  21.    London,  1879. 
5° 


LAW  AND  GOVERNMENT  51 

themselves,  it  follows  that  the  conservation  and  development 
of  that  productive  energy  is  the  most  constructive  policy  that 
any  government  can  pursue.  It  also  follows  that  the  worst 
form  of  waste  that  any  government  could  permit  or  encourage 
would  be  the  waste  of  the  productive  energy  of  the  people. 

The  repression  of  destructive  and  deceptive  action.  The  first 
and  most  obvious  thing  which  the  government  must  do  is  to 
prohibit  and  prevent  all  the  destructive  and  deceptive  forms 
of  conflict  as  outlined  at  the  beginning  of  the  last  chapter. 
It  is  of  the  utmost  importance  that  this  shall  be  accomplished ; 
and,  what  is  equally  important  in  determining  the  duty  of  the 
government,  law  and  government  are  the  only  agencies  which 
can  accomplish  it.  He  who  has  no  moral  scruples  against  pur- 
suing his  selfish  interests  by  destructive  or  deceptive  methods 
can  be  restrained  only  by  the  superior  force  of  the  many  as 
it  is  exercised  through  the  government.  If  he  is  allowed  to 
pursue  his  selfish  interests  by  these  methods,  he  not  only 
wastes  his  own  powers  in  unproductive  efforts  but  also  tends 
to  destroy  the  products  of  other  people  ;  and,  what  is  more 
important,  he  discourages  them  from  further  productive  effort, 
and  thus  causes  their  productive  powers  to  go  to  waste.  It  may 
therefore  be  said  that,  whatever  other  functions  government 
may  have,  its  primary  function  is  to  repress  the  destructive 
and  deceptive  methods  of  pursuing  self-interest. 

The  first  effect  of  this  repression  of  the  destructive  and 
deceptive  methods  is  to  transform  the  struggle  for  self-interest 
from  the  brutal  struggle  for  existence,  where  the  strong  prey 
upon  the  weak  and  the  ferocious  upon  the  gentle,  into  a 
struggle  wherein  the  persuasive  and  the  productive  triumph 
over  the  unpersuasive  and  the  unproductive.  If  it  were  possible 
(and  it  probably  is)  to  carry  this  repression  still  farther,  and 
not  only  to  eliminate  all  destruction  and  deception  but  also 
to  eliminate  from  persuasion  all  demagogy,  all  appeal  to  passion, 
everything  in  fact  except  the  appeal  to  reason  and  justice,  then 
it  would  be  literally  true  that  reason  would  everywhere  triumph 


52  PRINCIPLES  OF  POLITICAL  ECONOMY 

over  unreason,  justice  over  injustice,  usefulness  over  useless- 
ness,  and  productiveness  over  unproductiveness.  Under  such 
a  government  each  and  every  one  would  succeed  in  getting 
what  he  wanted  in  exact  proportion  as  he  contributed  to  others 
what  they  wanted  ;  the  most  useful  would  be  the  most  success- 
ful, and  the  indispensable  man  would  be  the  great  man.  In 
that  situation  we  should  have  a  literal  fulfillment  of  the  words, 
"  Whosoever  will  be  chief  among  you,  let  him  be  your  serv- 
ant." And  a  servant  is  not  necessarily  one  who  comes  at  your 
beck  and  call  to  do  your  bidding ;  he  may  be  merely  the  one 
who  does  you  a  service  or  who  produces  what  you  need. 

Nothing  could  be  more  favorable  to  the  prosperity  of  a 
nation  than  a  general  following  of  such  a  rule.  If  we  could 
conceive  of  a  nation  in  which  no  one  could  gain  anything 
except  by  producing  an  equivalent  or  by  contributing  an  equal 
amount  to  the  prosperity  of  someone  else,  then  the  more 
ardently  everyone  strove  to  better  his  own  condition,  the  more 
ardently  would  he  be  striving  to  better  the  condition  of  some- 
one else,  driven  thereto  not  by  benevolence  or  philanthropy, 
but  by  self-interest.  Then  the  more  people  there  were  striving 
to  acquire  wealth,  the  more  there  would  be  striving  to  produce 
it ;  and  the  more  ardently  they  desired  to  acquire  it,  the  more 
ardently  they  would  labor  to  produce  it.  Such  a  nation  would 
certainly  prosper  out  of  all  proportion  to  a  nation  in  which 
destructive  and  deceptive  methods  were  practiced  by  a  large 
proportion  of  its  people. 

Two  ways  of  promoting  the  productive  life.  There  are 
two  conceiveable  methods  by  which  such  an  ideal  might  be 
realized.  One  is  such  a  perfection  of  the  moral  nature  of 
every  person  in  the  nation  as  to  make  him  unwilling  to  gain 
anything  without  producing  it  or  its  equivalent  or  rendering 
a  service  of  equivalent  value.  The  other  is  such  perfection  of 
law  and  government  as  to  make  it  impossible  for  anyone,  how- 
ever much  he  desired  to  do  so,  to  gain  anything  without  pro- 
ducing it  or  its  equivalent  or  rendering  an  equivalent  service. 


LAW  AND  GOVERNMENT  53 

In  neither  case  would  it  be  necessary  for  men  to  cease  caring 
more  for  themselves  and  their  own  families  and  neighbors 
than  for  other  men  and  their  families  and  neighbors.  In 
neither  case  would  it  be  necessary  to  do  away  with  competition, 
or  the  struggle  for  individual  gain.  It  would  only  be  neces- 
sary so  to  hedge  men  about,  either  by  moral  restraints  or  by 
positive  laws,  as  to  compel  them  to  compete  fairly,  always 
giving  an  equivalent  for  everything  they  get. 

It  must  not  be  hastily  assumed  that  the  repression  by  the 
government  of  the  destructive  and  deceptive  methods  of  acquir- 
ing possession  of  desirable  things  is  merely  negative  work. 
By  this  kind  of  repression  every  producer  is  protected  in  the 
possession  and  enjoyment  of  the  fruits  of  his  own  productive 
effort.  Knowing  that  he  will  enjoy  the  full  advantage  of  his 
own  industry,  enterprise,  and  foresight,  he  will  have  the  strong- 
est kind  of  motive  for  exercising  these  virtues  to  their  full 
capacity.  This  lets  loose  the  productive  energy  of  the  people 
in  a  way  which  would  be  impossible  without  the  protection  of 
law  and  government.  The  people  can  be  trusted  to  take  the 
initiative  and  start  all  sorts  of  productive  enterprises  if  they 
are  thus  safeguarded.  There  is  nothing  any  more  positive  and 
constructive  than  the  free  spirit  of  a  vigorous  race  of  people 
when  they  are  left  to  direct  themselves  in  the  field  of  produc- 
tion but  are  restrained  from  entering  the  fields  of  destruction 
and  deception.  They  can  safely  be  intrusted  with  the  task  of 
looking  after  themselves  if  those  who  are  criminally  inclined 
can  be  prevented  from  interfering  with  them.  Give  the  people 
confidence  in  the  justice  and  efficiency  of  the  government  and 
in  one  another,  and  their  own  productive  virtues  will  develop, 
their  industrial  power  will  multiply  itself,  and  the  prosperity 
and  power  of  the  nation  will  be  assured. 

Confidence  and  economy.  Confidence  is  one  of  the  greatest 
of  all  economizers  of  human  energy.  Its  greatest  value  is  not 
in  the  stability  which  it  brings  to  the  financial  market,  though 
that  is  very  important.  It  is  found  rather  in  the  unshackling 


54  PRINCIPLES  OF  POLITICAL  ECONOMY 

of  enterprise  which  results  from  confidence  in  the  government 
and  in  one's  neighbors  and  fellow  citizens.  The  average 
citizen  has  more  points  of  contact  with  his  neighbors,  his 
associates  in  business,  and  his  fellow  citizens  than  with  the 
government  or  the  financial  market.  The  sum  total  of  his 
dealings  with  his  fellows  exceeds  that  of  his  dealings  with  both 
the  government  and  the  financial  market.  It  is  in  these 
numerous  points  of  contact,  and  in  the  vast  sum  of  these  deal- 
ings of  man  with  man,  that  confidence  produces  its  greatest 
economies,  and  its  lack  the  greatest  waste. 

Professor  E.  A.  Ross,  in  his  book  entitled  "  The  Changing 
Chinese,"  mentions  certain  bad  neighborhoods  in  China  where 
the  farmer  must  guard  his  rice  field  every  night  to  keep  his 
crop  from  being  destroyed  or  stolen.  The  energy  that  is 
wasted  when  so  many  people  stay  awake  every  night  must  be 
stupendous,  but  this  waste  is  a  trifling  matter  compared  with 
the  discouragement  and  lack  of  enterprise  which  result  from 
the  feeling  of  uncertainty  which  such  lawless  conditions  beget. 
Unless  we  have  at  some  time  been  confronted  by  the  same 
situation,  we  can  hardly  realize  how  much  energy  we  save  by 
being  able  to  sleep  at  night  in  confidence  that  the  products 
of  our  labor  will  not  disappear  before  morning. 

Before  we  expend  too  much  sympathy  on  those  Chinese 
farmers,  we  should  consider  the  condition  of  the  fruit  growers, 
gardeners,  and  farmers  in  the  neighborhood  of  some  of  our 
large  towns.  Unless  one  is  very  favorably  situated  with  respect 
to  police  protection,  one  is  frequently  compelled  to  keep  a 
watchman  or  else  to  expose  the  entire  produce  of  his  toil  to 
the  depredations  of  town  marauders.  Even  though  these 
marauders  are  generally  thoughtless  rather  than  vicious,  their 
work  is  just  as  expensive  to  the  producer  as  though  they  were 
degenerate  criminals.  They  occasion  the  same  economic  waste 
and  discouragement ;  they  therefore  detract  just  as  much  from 
the  national  efficiency  and  add  just  as  much  to  the  cost  of  the 
necessaries  of  life  for  all  classes,  the  very  poor  as  well  as 


LAW  AND  GOVERNMENT  55 

the  very  rich.  Their  depredations  are  especially  disastrous  to 
the  family  garden,  where  the  owner  cannot  afford  to  hire  a 
watchman  and  is  himself  engaged  in  other  work  which  makes 
it  necessary  for  him  to  sleep  at  night. 

Observance  of  law  a  patriotic  duty.  There  are  three  reasons 
for  choosing  the  orchardist  and  the  gardener  as  examples  of 
producers  who  gain  through  a  government  and  a  community 
in  which  they  can  have  confidence,  and  lose  through  a  govern- 
ment and  a  community  in  which  they  can  have  no  confidence. 
In  the  first  place,  it  is  so  obvious  that  it  does  not  have  to  be 
proved,  that  these  men  are  producers  who  contribute  certain 
vital  necessities  to  the  prosperity  and  well-being  of  the  whole 
community,  and  that  the  community  gains  when  they  are 
successful  and  suffers  when  they  are  unsuccessful.  In  the 
second  place,  certain  young  persons  who  read  this  book  may 
know  something  at  first  hand  about  the  troubles  and  dis- 
couragements which  those  producers  have.  In  the  third  place, 
it  ought  to  be  easy  for  the  average  person  to  understand  that 
any  act  of  his  which  makes  it  uncertain  as  to  whether  or 
not  the  producer  will  reap  certain  rewards  of  his  labor  is 
an  injury  not  only  to  the  producer  but  to  the  consumer  and 
to  the  whole  nation  as  well,  and  that,  in  consequence,  the 
observance  of  law  and  the  preservation  of  order  are  as  truly 
patriotic  duties  as  fighting  the  battles  of  one's  country. 

Standardization  and  economy.  Aside  from  police  protection 
there  are  certain  other  important  functions  which  law  and 
government  can  perform  better  than  private  individuals  or 
voluntary  groups  of  individuals.  t  One  of  the  most  important 
of  these  is  the  standardizing  of  coins,  weights,  and  measures. 
Whatever  differences  of  opinion  may  exist  with  respect  to 
other  functions  of  government,  little  is  said  or  to  be  said 
against  coining  money  and  fixing  the  standards  of  weights 
and  measures.1  Though  these  two  functions  are  grouped 

1  See  the  author's  articles  on  "  Standardization  in  Marketing,"  Quarterly 
fotimal  of  Economics,  February,  1917. 


56  PRINCIPLES  OF  POLITICAL  ECONOMY 

together  in  the  same  clause  of  our  federal  constitution,  it  is 
doubtful  if  it  is  generally  understood  what  a  close  connection 
there  is  between  them.  Both  result  in  great  economy  of  effort 
in  the  transfer  of  goods.  The  economy  involved  in  transfer- 
ring coined  money  instead  of  uncoined  metal  is  apparent.  Coin- 
ing the  metal  by  a  reliable  and  responsible  government  merely 
gives  the  public  confidence  in  its  weight  and  fineness.  When 
it  is  once  coined,  it  is  enabled  to  pass  from  hand  to  hand 
without  the  labor  of  inspection  on  the  part  of  everyone  who 
receives  it.  Otherwise  the  receiver  would  always  have  to  weigh 
it  to  determine  its  quantity  and  test  it  to  determine  its  quality. 
When  it  is  coined  it "  sells  "  (if  we  may  speak  of  selling  money) 
on  grade  and  reputation  rather  than  on  inspection.  Confidence 
is  what  makes  it  sell  on  grade  and  reputation ;  lack  of  con- 
fidence would  necessitate  inspection,  that  is,  weighing  and 
testing,  which  would  be  very  wasteful  of  time  and  labor. 

By  the  process  of  standardization  any  other  commodity  may 
also  sell  on  grade  and  reputation  rather  than  on  inspection. 
This  also  would  be  economical  and,  as  in  the  case  of  coin, 
would  be  a  result  of  confidence.  All  civilized  governments 
have  done  something  toward  standardization  and  the  establish- 
ment of  confidence  by  fixing  uniform  standards  for  deter- 
mining quantity ;  that  is,  by  fixing  standards  of  weights  and 
measures.  In  proportion  as  these  standards  are  fixed  and 
enforced  by  law  we  save  time  and  energy  in  transferring 
goods.  If  it  were  possible  to  go  farther  and  both  fix  and 
enforce  standards  of  quality  as  well  as  of  quantity,  still  greater 
economies  would  be  effected. 

Individuals  and  firms  have  frequently  succeeded  in  standard- 
izing their  goods,  both  as  to  quantity  and  as  to  quality,  so 
effectively  that  buyers  can  buy  on  grade  and  reputation  rather 
than  on  inspection.  Whenever  individuals  or  firms  succeed 
in  inspiring  such  a  degree  of  confidence,  it  generally  increases 
the  salability  of  their  goods.  It  saves  the  purchaser  some 
time  and  trouble,  and  he  is  usually  willing  to  pay  something 


LAW  AND  GOVERNMENT  57 

for  that  saving.  Only  the  government,  however,  can  enforce 
uniform  standards  among  all  producers  and  all  dealers. 

Not  the  least  of  the  advantages  of  a  minute  division  of 
labor1  is  the  fact  that  each  individual  can  avoid  the  necessity 
of  being  expert  in  many  things,  and  therefore  has  time  to 
become  a  specialist  in  one  thing.  One  of  the  advantages  of 
standardizing  commodities  is  that  the  average  consumer  can 
save  himself  the  trouble  of  being  an  expert  buyer  or  an  expert 
judge  of  the  many  things  which  he  has  to  purchase.  If  he 
has  confidence  not  only  in  the  weights  and  measures  but  also 
in  the  government  which  standardizes  and  the  seller  who 
uses  them,  and  if  he  has  the  same  degree  of  confidence  in 
the  alleged  quality  of  the  goods  offered  for  sale,  he  may  make 
his  purchases  with  very  little  expenditure  of  time  and  strength 
and  save  his  time  and  strength  for  his  own  special  work. 

The  enforcement  of  contracts  and  agreements  is  another 
way  of  creating  confidence,  and,  through  the  creation  of  con- 
fidence, of  economizing  energy  and  encouraging  production. 
Where  men  commonly  regard  contracts  as  scraps  of  paper,  and 
do  not  solemnly  and  completely  fulfill  them,  and  where  law 
and  government  fail  to  compel  their  literal  fulfillment,  there 
would,  of  course,  be  great  difficulty  in  working  together  in 
productive  enterprises. 

The  exercise  of  authority.  It  is  clear,  therefore,  that  one 
very  important  function  of  government  is  to  create  that  state 
of  confidence  which  results  in  economy,  and  to  create  it,  first, 
by  repressing  destruction  and  deception  through  the  police 
power  of  the  state,  second,  by  standardizing  products,  and, 
third,  by  enforcing  contracts.  These  tasks,  which  are  neces- 
•sary  in  the  interest  of  the  highest  economy,  are  thrown  upon 
the  government  because  no  other  agency  is  in  a  position  to 
perform  them.  They  call  for  the  exercise  of  authority,  backed 
up  by  physical  force,  and  that  is  a  work  which  can  be  intrusted 
to  no  private  agency. 

1  See  Chapter  XI,  The  Division  of  Labor. 


58  PRINCIPLES  OF  POLITICAL  ECONOMY 

We  need  not  limit  the  functions  of  government,  however, 
to  those  requiring  the  exercise  of  authority,  though  usually 
it  will  be  found  that  the  government  is  best  fitted  to  perform 
those  which  require  some  degree  of  authority,  whereas  private 
individuals  and  organizations  can  usually  be  intrusted  with 
those  enterprises  which  can  be  carried  out  wholly  on  the  basis 
of  free  contract.  This  distinction  is  not  always  clear,  but  a 
little  careful  study  will  usually  reveal  the  fact  that  there  is  an 
element  of  compulsion  in  those  enterprises  which  the  govern- 
ment carries  on  most  successfully.  The  maintenance  of  light- 
houses will  serve  as  an  illustration.  If  a  private  company  were 
to  maintain  lighthouses,  its  product,  light,  would  be  difficult 
to  sell.  The  light  would  shine  for  all  who  came  within  its 
reach,  and  the  shipowner  who  refused  to  pay  for  it  would 
get  the  same  advantage  as  the  one  who  paid  his  share.  All 
who  get  the  benefit  should  be  compelled  to  pay  a  share  of 
the  cost,  either  in  the  form  of  taxation  or  in  some  other  form. 
This  requires  a  power  of  compulsion  which  the  government 
alone  possesses. 

Even  in  the  case  of  the  post  office,  as  it  is  thought  best  to 
run  it,  there  is  an  element. of  compulsion.  Many  local  post 
offices  are  maintained  at  a  loss,  since  there  is  not  local  busi- 
ness enough  to  pay  expenses.  Under  private  management 
these  local  offices  would  be  closed,  unless  the  people  of  the 
neighborhood  would  voluntarily  pay  enough  postage  to  cover 
expenses,  or  unless  larger  communities  would  voluntarily  pay 
enough  surplus  to  cover  the  losses  on  the  smaller  offices.  It 
is  deemed  expedient  to  establish  a  uniform  rate,  regardless  of 
differences  in  the  cost  of  service.  Some  people  are  therefore 
compelled  to  pay  more  than  the  cost  of  the  service  which  they 
receive,  in  order  that  others  may  get  their  service  for  less 
than  it  costs.  No  one  complains  of  this,  but  it  is  apparent 
that  it  could  not  be  carried  on  in  this  way  on  the  basis  of 
free  contract.  Some  degree  of  compulsion  is  necessary  in 
order  to  compel  some  people  in  some  localities  to  pay  higher 


LAW  AND  GOVERNMENT  59 

rates  than  are  necessary,  —  higher  than  they  would  have  to 
pay  if  they  were  permitted  to  patronize  private  postal  carriers. 
The  good  of  the  whole  country  seems  to  demand  that  this 
be  done.  The  government  alone  can  exercise  the  necessary 
authority,  since  it  is  sometimes  thought  best  even  to  compel 
the  people  to  pay  in  the  form  of  taxes  enough  to  cover  the 
losses  on  the  postal  business. 

However,  we  need  not  hold  to  any  hard-and-fast  definition 
of  the  functions  of  the  government.  It  is  sufficient  to  say  that 
anything  is  a  proper  task  for  the  government  if  there  is  rea- 
sonable ground  for  believing  that  the  government  can  do  it 
better  and  more  economically  than  private  enterprise  can  rea- 
sonably be  expected  to  do  it.  That  reasonable  ground  exists 
in  favor  of  government  enterprise  whenever  authority  or  com- 
pulsion is  necessary  to  its  successful  accomplishment.  When 
there  is  no  need  whatever  for  compulsion  (that  is,  when  every 
part  of  the  work,  including  the  selling  of  the  product,  can  be 
conducted  on  the  voluntary  basis  of  free  contract),  the  general 
tendency  is  to  leave  the  task  to  private  enterprise. 

Beneficent  uses  of  power.  There  is  a  wide  difference,  how- 
ever, between  using  force  to  compel  a  man  to  do  something 
which  he  has  voluntarily  contracted  to  do  and  using  it  to  com- 
pel him  to  do  something  which  he  has  never  agreed  to  do  and 
would  prefer  not  to  do.  As  a  matter  of  observation  it  will  be 
found  that  most  if  not  all  of  the  things  which  the  government 
is  able  to  do  well  involve  some  element  of  compulsion  of  the 
latter  kind.  Public  education  will  serve  as  an  example.  Wher- 
ever it  is  a  success,  there  is  either  compulsory  attendance  or 
compulsory  payment,  or  a  combination  of  both.  In  the  lower 
grades  of  our  public-school  system  we  have  both.  In  the 
higher  grades  and  in  our  state  colleges  and  universities  we 
have  compulsory  payment ;  that  is,  the  taxing  power  of  the 
government  is  used  to  procure  the  means  for  the  payment  of 
expenses.  Both  compulsory  attendance  upon  the  lower  grades 
and  compulsory  support  of  all  grades  are  beneficent  uses  of 


60  PRINCIPLES  OF  POLITICAL  ECONOMY 

the  power  of  the  government  over  the  individual ;  but  it  must 
be  remembered  that  it  is  the  use  of  power.  There  is  no  reason 
for  believing  that  a  government  school  on  a  purely  voluntary 
basis  would  be  superior  to  a  private  school  ;  that  is  to  say,  if 
both  attendance  and  payment  were  voluntary  on  the  part  of 
individuals,  it  is  difficult  to  see  how  it  could  be  more  successfully 
managed  by  the  government  than  by  some  private  agency. 

That  which  is  true  of  public  education  appears  to  be  true 
of  every  other  enterprise  upon  which  it  would  be  possible 
for  the  government  to  enter.  The  government  has  no  advan- 
tage over  a  private  individual  or  a  voluntary  association  of 
individuals  except  in  the  use  of  force  or  compulsion.  That 
is  to  say,  any  enterprise  which  can  be  carried  on  on  a  purely 
voluntary  and  contractual  basis,  without  any  use  of  compul- 
sion except  in  the  enforcement  of  contracts  which  are  them- 
selves voluntarily  entered  into,  can  probably  be  fully  as  well 
managed  by  private  individuals  and  associations  as  by  the  gov- 
ernment ;  but  if  any  degree  of  compulsion  is  necessary  in 
order  to  insure  its  success,  it  becomes  a  fit  subject  for  gov- 
ernment enterprise.  There  is  undoubtedly  a  large  field  for 
the  beneficent  exercise  of  compulsion.  There  is  also  a  large 
field  where  freedom  and  voluntary  agreements  are  better  than 
compulsion.  If  we  can  locate  the  limits  of  the  beneficent 
exercise  of  force,  we  shall  have  located  the  limits  to  the 
beneficent  exercise  of  government  enterprise. 

Human  interests  sometimes  in  conflict  and  sometimes  in 
harmony.  In  a  previous  chapter  it  was  pointed  out  that 
human  interests  are  frequently  in  conflict  with  one  another. 
They  are  also  frequently  in  harmony  with  one  another.  Where 
they  are  in  conflict,  that  is,  where  one  man's  interest  conflicts 
with  that  of  someone  else,  there  is  likely  to  be  trouble. 
Only  three  things  can  prevent  uneconomic,  that  is  to  say, 
either  destructive  or  deceptive,  conflict.  The  first  is  the  vol- 
untary submission  of  the  weaker  man  through  fear.  That 
results  in  despotism.  The  second  is  such  moral  self-restraint 


LAW  AND  GOVERNMENT  6l 

on  the  part  of  one  or  both  as  will  prevent  a  quarrel.  Willing- 
ness to  give  up  not  only  one's  coat  but  one's  cloak  also 
would  preserve  peace.  The  third  is  a  strong  and  effective 
umpire  who  will  promptly  decide  the  case  and  enforce  his 
decision  upon  both  parties  to  the  conflict.  This  umpire  is 
the  government. 

It  will  generally  be  agreed,  except  by  extreme  anarchists, 
that  wherever  human  interests  come  in  conflict,  a  strong  um- 
pire of  some  kind  will  be  necessary  until  men  are  so  self- 
restrained  by  their  morals  or  their  religion  as  to  govern 
themselves.  Without  such  self-restraint  the  conflict  of  inter- 
ests will  result  in  the  wasting  of  human  life  and  energy  by 
destructive  combats,  fights,  and  duels,  unless  there  is  a  govern- 
ment at  hand  to  settle  the  difference  and  send  the  disputants 
about  their  business. 

Government  control  unnecessary  where  human  interests  are 
in  harmony.  But  human  interests  are  sometimes  harmonious. 
When  this  is  the  case,  the  individual  who  pursues  his  own 
interest  is  also  promoting  the  interest  of  others.  Within  this 
field  where  interests  are  in  harmony  it  is  true,  as  Adam  Smith 
said  long  ago,  that  we  are  sometimes  led  as  by  an  invisible  hand 
to  promote  the  public  interest  while  trying  to  promote  our 
own.1  It  is  to  the  interest  of  the  farmer  to  grow  good  crops  ; 
it  is  likewise  to  the  interest  of  the  public  to  have  him  do 
so.  In  this  and  a  vast  multitude  of  other  cases  the  individual 
needs  no  compulsion  to  lead  him  to  promote  the  public  good. 
In  all  such  cases  it  seems  to  work  better  in  the  long  run 
to  leave  the  individual  very  much  to  himself.  The  wise 
government  will  generally  keep  its  hands  off. 

1  He  generally,  indeed,  neither  intends  to  promote  the  public  interest,  nor 
knows  how  much  he  is  promoting  it.  ...  By  directing  [his]  industry  in  such  a 
manner  as  its  produce  maybe  of  greatest  value,  he  intends  only  his  own  gain, 
and  he  is  in  this,  as  in  many  other  cases,  led  by  an  invisible  hand  to  promote 
an  end  which  was  no  part  of  his  intention.  ...  By  pursuing  his  own  interest 
he  frequently  promotes  that  of  society  more  effectually  than  when  he  really 
intends  to  promote  it.  —  "Wealth  of  Nations,"  Book  IV,  Chapter  II. 


62  PRINCIPLES  OF  POLITICAL  ECONOMY 

Tendency  of  government  officers  to  increase  their  own  power 
and  importance.  There  is,  however,  a  natural  tendency  in  all 
human  beings  to  wish  to  magnify  their  own  power  and  im- 
portance. This  tendency  seems  to  be  peculiarly  strong  in  that 
kind  of  person  who  manages  to  get  elected  to  public  office. 
Modesty  is  not  the  outstanding  characteristic  of  the  average 
candidate  who  seeks  office,  though  he  may  feign  it  pretty  well. 
The  more  the  government  undertakes,  the  greater  becomes  the 
power  and  importance  of  the  officeholder.  There  is,  therefore, 
a  strong  tendency  on  the  part  of  all  successful  candidates  to 
extend  the  functions  of  government.  The  arguments  in 'favor 
of  this  policy  as  used  by  the  elected  are  sometimes  so  subtle 
as  to  deceive  the  very  elect.  They  are  always  made  as  though 
in  the  interest  of  the  people,  though  they  are  really  in  the 
interest  of  the  officeholding  class.  It  is  a  means  of  exalting 
the  position  of  the  vote  getter.  It  therefore  behooves  the 
average  citizen  who  has  no  hope  of  public  office  to  study 
very  critically  all  arguments  in  favoring  the  extension  of  the 
functions  of  the  government. 

The  incompetent.  There  is,  however,  the  question  of  the 
people  who  are  not  competent  to  pursue  intelligently  either 
their  own  interest  or  the  public  interest.  The  feeble-minded, 
the  insane,  and  the  immature  who  have  no  natural  guardians 
must  of  course  have  their  interests  looked  after  and  cared  for 
by  the  government.  With  them  it  is  not  a  question  of  the 
conflict  or  harmony  of  their  interests  with  those  of  the  public ; 
it  is  a  question  of  their  competence  to  pursue  even  their  own 
interests  intelligently. 

The  individual's  wisdom  is  not  increased  suddenly  when 
he  is  put  into  public  office.  Is  anyone  really  competent  to 
pursue  his  own  interest  intelligently?  This  question  is  some- 
times asked  by  those  who  advocate  government  activity  in 
behalf  of  all  classes  of  people.  This  is  not  a  very  convincing 
argument,  for  the  reason  that  it  goes  too  far.  If  no  one  is 
competent  to  look  after  his  own  interests,  how  can  he  possibly 


LAW  AND  GOVERNMENT  63 

be  competent  to  look  after  the  interests  of  the  rest  of  man- 
kind ?  The  officeholder  is  merely  a  man  or  a  woman  like  the 
rest  of  us.  If  we  are  not  able  to  look  after  ourselves,  neither 
is  he  or  she  able  to  look  after  himself  or  herself,  much  less 
to  look  after  the  rest  of  us. 

Because  of  such  considerations  as  these  the  wisdom  of 
mankind  has  for  centuries  moved  toward  the  conclusion  that 
government  should  confine  itself  mainly  to  the  control  of  the 
field  where  individual  interests  come  in  conflict,  leaving  mature 
people  of  sound  mind  to  govern  themselves  wherever  and 
whenever  their  interests  are  harmonious.  There  are  occasional 
reactionary  tendencies  toward  more  government  interference, 
but  these  are  usually  encouraged  by  those  whose  expertness 
lies  in  the  direction  of  vote  getting  rather  than  by  those 
whose  expertness  consists  in  the  power  to  do  the  useful  and 
necessary  things. 


CHAPTER  VI 


MORALS  AND  RELIGION 

It  was  suggested  in  a  former  chapter  that  the  prosperity  of 
a  nation  depended  more  upon  the  economizing  and  utilizing 
of  its  fund  of  human  energy  than  upon  any  other  factor,  and 
that  in  consequence  the  most  destructive  forms  of  waste  were 
those  which  wasted  or  dissipated  portions  of  that  fund.  When 
a  man's  energy  is  going  to  waste,  his  life  is  going  to  waste, 
and  he  becomes  a  drain  upon,  rather  than  an  addition  to,  the 
national  strength.  The  following  outline  indicates  some  of  the 
more  familiar  ways  in  which  men  go  to  waste : 

f  Th    'rll    /  Inv°luntai"ity  (the  unemployed) 
L  Voluntarily  (the  leisure  class) 

The  ineffectively   f  Through  lack  of  training 

<  Through  lack  of  opportunity 
^  Through  lack  of  initiative 

f  In  vice 
Wasting  their  own  energy  4  _     ,.    . 

L  In  dissipation 


MEN  WHO 

employed 

GO  TO       • 

WASTE 

The  harmfully 

employed 

Wasting  the  energy 
of  other  people 


By  crime 

By  fraud 

By  luxury 

By  bad  investing 

By  false  teaching 


For  some  of  these  forms  of  waste,  law  and  government  alone 
can  furnish  the  remedy.  Whenever  force  or  compulsion  is 
necessary  and,  at  the  same  time,  effective,  government  can 
and  should  use  the  force  of  positive  law,  supported  by  penal- 
ties. But  there  are  many  forms  of  waste  which  cannot  be 


MORALS  AND  RELIGION  65 

remedied  by  force  or  compulsion,  at  least  not  without  causing 
greater  waste  of  other  kinds.  To  try  to  control  by  law  such 
things  as  laziness,  private  vices,  luxury,  false  teaching,  and 
many  other  wasteful  and  harmful  tendencies  would  require  an 
intolerable  amount  of  espionage  and  repression.  The  waste 
from  this  source  might  easily  overbalance  the  waste  from  the 
bad  habits  which  the  law  was  trying  to  control.  In  all  such 
cases  we  must  fall  back  upon  morals  and  religion  to  induce 
self-restraint  and  the  voluntary  adoption  of  sound  habits. 

Can  morality  be  taught?  There  are  two  conflicting  theories 
as  to  the  results  of  moral  teaching.  One  is  that  such  results 
are  generally  negligible  because  moral  habits  are  the  result  of 
economic  and  social  surroundings ;  the  other  is  that  man's 
moral  nature  may  be  so  developed  by  teaching  and  example  as 
to  render  it  proof  against  bad  economic  and  social  conditions, 
—  that  these  conditions  are  more  likely  to  be  the  result  than 
the  cause  of  the  moral  habits  of  the  people.  The  truth  seems 
to  be  found  in  a  combination  of  these  two  theories.  We  are 
undoubtedly  influenced  by  our  surroundings,  but  we  can  also 
by  sheer  force  of  character  not  only  resist  but  even  overcome 
and  change  our  surroundings. 

Again,  weak  characters  are  more  largely  controlled  by  their 
surroundings  than  are  strong  characters.  Two  men  may  go 
under  a  cold  shower  bath.  One,  being  in  vigorous  health, 
comes  out  feeling  refreshed.  To  him  a  cold  shower  is  a 
favorable  rather  than  an  unfavorable  condition.  The  other, 
being  weak  to  begin  with,  comes  out  with  a  chill.  To  him  it 
was  an  unfavorable  rather  than  a  favorable  condition.  Yet 
it  was  the  same  shower  bath,  with  the  same  temperature  etc. 
If  one  were  studying  jellyfish,  one  might  find  that  they  were 
the  sport  of  such  circumstances  as  the  winds,  the  waves,  the 
tides,  and  the  ocean  currents  ;  but  if  one  were  studying  sharks, 
one  might,  with  equal  certainty,  find  that  they  were  indepen- 
dent of  all  such  circumstances.  Similarly,  if  one  were  study- 
ing human  jellyfish,  one  might  find  them  and  their  moral 


66  PRINCIPLES  OF  POLITICAL  ECONOMY 

habits  to  be  the  result  of  their  economic  and  social  surround- 
ings ;  but  if  one  were  studying  human  sharks,  one  might 
reach  just  the  opposite  conclusion.  As  a  matter  of  fact,  those 
are  the  conclusions,  in  general,  which  students  actually  reach 
who  study  two  different  types  of  people.  When  we  study 
considerable  numbers  of  the  unfortunate  people  who  have  not 
succeeded  in  life,  or  who  are  more  or  less  complete  failures, 
we  generally  attribute  their  failures  to  bad  surroundings  or 
unfortunate  circumstances.  When  we  study  men  who  have 
made  conspicuous  successes,  we  are  likely  to  attribute  their 
successes  to  their  own  sterling  qualities.  It  would  be  impossible 
to  say  whether  the  circumstances  under  which  the  former  class 
grew  up  were  better  or  worse  than  those  under  which  the 
latter  class  grew  up.  In  fact,  many  of  our  greatest  men  and 
women  came  out  of  the  worst  conditions. 

The  unemployed.  If  we  begin  with  the  involuntarily  idle, 
that  is,  the  unemployed,  as  given  in  the  outline  on  page  64, 
we  shall  find  that  many  of  them  are  the  victims  of  circumstances 
which  they  lacked  the  strength  to  combat  successfully.  Fre- 
quently the  hostile  circumstances  have  been  such  as  no  one 
could  stand  against.  In  these  cases  no  moral  problem  is 
involved.  They  are  entitled  to  all  the  sympathy  and  aid  which 
society  can  give  them.  In  other  cases  it  was  their  own  weak- 
ness or  their  own  injurious  habits  which  made  them  unemploy- 
able. There  is  no  doubt  that  better  moral  and  religious 
teaching  would  have  given  them  a  moral  brace  and  helped 
them  to  succeed.  At  any  rate,  the  fact  that  they  are  now  idle 
means  that  they  are  going  to  waste  and  are  a  drain  upon, 
rather  than  a  contribution  to,  the  national  prosperity,  power, 
and  greatness.  Anything  which  can  be  done  for  future  genera- 
tions to  reduce  the  number  of  such  unemployed  people  will  be 
a  definite  contribution  to  the  strength  of  the  nation.  More 
moral  vigor,  sounder  habits,  and  better  training  are  apparently 
needed  for  our  economic  prosperity,  as  well  as  for  purely  moral 
or  religious  reasons. 


MORALS  AND  RELIGION  6? 

The  leisure  class.  When  we  come  to  deal  with  the  volun- 
tarily idle,  that  is,  with  the  leisure  class,  we  are  on  more 
certain  ground.  It  is  in  no  sense  their  misfortune,  it  is  their 
fault,  that  they  are  idle.  The  fact  that  they  are  voluntarily 
rather  than  involuntarily  idle  implies  that  they  could  do  some- 
thing useful  if  they  chose,  but  they  do  not  choose  to  do  so.  It 
is  not  opportunity  which  they  need ;  it  is  moral  regeneration. 

We  must  be  careful,  however,  not  to  confuse  the  person 
who  does  not  have  to  earn  his  living  with  the  person  who  is 
idle.  Many  persons  of  independent  means  are  doing  work  of 
the  very  highest  utility  to  the  nation  and  to  the  world.  Scien- 
tific investigation,  experimentation,  and  invention,  historical 
and  literary  study,  agricultural  and  mechanical  demonstration, 
political  reform,  and  philanthropy,  have  all  been  promoted  by 
men  and  women  who  could  afford  to  give  their  time  to  such 
things.  The  leisure  class,  properly  so  called,  includes  only 
those  who  do  little  or  nothing  that  is  useful  or  productive, 
but  give  themselves  over  to  mere  self-enjoyment  or  self- 
cultivation.  Self-cultivation  as  preparation  for  useful  work  is 
itself,  of  course,  useful ;  but  without  some  useful  object  in 
view,  that  is,  without  a  view  to  making  one's  self  a  con- 
tributor to  the  national  prosperity  and  well-being,  it  is  useless. 
The  person  who  spends  his  time  in  this  kind  of  self-cultivation 
is  going  to  waste  as  truly  as  though  he  were  spending  his 
time  in  eating,  drinking,  and  acquiring  adipose  tissue,  gout, 
or  diabetes. 

Whoever  belongs  to  the  leisure  class  as  thus  defined  is  a 
drain  upon  the  wealth  and  prosperity  of  the  nation.  The 
nation  is  better  off  every  time  such  a  person  leaves  the  world. 
Since  he  does  nothing  useful,  nothing  is  lost  when  he  ceases 
to  exist.  When  he  ceases  consuming,  his  food  and  clothing 
at  least  are  saved.  His  wealth,  of  course,  remains  behind  even 
after  he  is  gone.  He  came  into  the  world  naked,  and  when 
he  leaves  the  world  he  takes  nothing  with  him.  The  more 
such  people  there  are  in  the  nation  in  proportion  to  the 


68  PRINCIPLES  OF  POLITICAL  ECONOMY 

workers  the  worse  it  is  for  the  nation  in  the  long  run.  The 
fewer  such  people  there  are,  that  is,  the  larger  the  proportion 
of  workers,  the  better  off  the  nation  will  be  in  the  long  run. 
The  whole  nation  has  to  be  supported  by  the  labor  of  those 
who  work.  If  all  the  people  work,  the  task  is  lightened,  or 
else  the  people  live  better.  If  only  a  part  of  them  work,  the 
burden  upon  the  workers  is  either  heavier  or  else  there  is  less 
produced  and  consequently  less  wealth. 

Do  idle  consumers  make  a  market  for  producers?  It  is 
sometimes  argued,  however,  that  a  large  number  of  consumers 
who  are  not  themselves  producers  is  necessary  to  make  a  mar- 
ket for  the  producers.  An  appearance  of  reasonableness  is 
given  to  this  argument  by  taking  the  case  of  a  single  product, 
say  potatoes,  though  any  other  product  would  do  equally  well. 
It  is  undoubtedly  a  good  thing  for  the  potato  growers  to  have 
a  large  number  of  consumers  of  potatoes  who  are  not  them- 
selves growers  of  potatoes,  provided  the  consumers  have  some- 
thing to  give  in  exchange  for  potatoes.  If  the  would-be 
consumers  of  potatoes  do  not  have  something  to  give  in  ex- 
change, the  growers  will  gain  nothing  from  them.  The  more 
the  consumers  have  which  can  be  given  in  exchange,  the  more 
profitable  it  is  likely  to  be  for  the  potato  growers.  If  the  con- 
sumers of  potatoes  are  living  on  accumulated  wealth,  they  will 
have  less  to  give  in  exchange  than  they  would  have  if,  in 
addition  to  their  accumulated  wealth,  they  were  also  produc- 
•  ing  or  earning  something.  The  more  workers  there  are  in 
other  productive  fields  besides  potato  growing,  the  more  other 
things  there  will  be  to  be  given  in  exchange  for  potatoes. 
This  is  a  statement  which  can  be  repeated  with  respect  to 
each  and  every  industry  or  occupation,  which  merely  brings 
us  back  to  the  general  statement  that  the  more  workers  and 
the  fewer  idlers  there  are  in  any  nation,  the  more  abundant 
will  goods  of  all  kinds  become,  and  the  more  rapidly  will  the 
nation  advance  in  prosperity  and  power.  Overproduction  of 
everything  is  an  impossibility. 


MORALS  AND  RELIGION  69 

Some  are  willing  to  grant,  however,  that  it  would  be  better 
economically  if  everyone  would  work  than  it  would  be  if  some 
wasted  their  time  in  idleness.  After  admitting  this,  it  will  be 
asked,  nevertheless,  Has  not  a  man  a  right  to  remain  idle  if 
he  has  accumulated  enough  to  support  himself  without  further 
work  ?  Assuming  that  he  has  earned  his  accumulation  and 
has  not  secured  it  by  inheriting  it,  by  marrying  it,  or  by  a 
fortunate  speculation  in  land,  there  is  something  to  be  said 
for  this  contention.  But  he  who  does  less  well  than  he  can, 
does  ill.  One  who  is  still  capable  of  doing  useful  work,  and 
chooses  not  to  do  it,  is  certainly  doing  less  well  for  his 
country  than  he  might,  even  though  he  did  well  when  he 
accumulated  wealth. 

Should  men  be  allowed  to  accumulate  wealth?  But  why 
rely  upon  morals  and  religion  to  prevent  this  form  of  waste 
or  ill-doing  ?  Why  not  prevent  men  from  living  in  idleness 
by  forbidding  them  to  accumulate  wealth  or  by  taking  it  away 
from  them  by  law  if  they  do  so  ?  Here  is  a  dilemma  which  no 
kind  of  compulsion  can  remove.  If  men  are  not  allowed  to 
accumulate  wealth,  they  will  then  be  encouraged  to  consume 
their  incomes  as  they  go  along.  Wasteful  or  luxurious  con- 
sumption is  quite  as  wasteful  as  idleness.  Here,  then,  is  the 
dilemma.  If  men  whose  incomes  are  larger  than  is  neces- 
sary to  support  them  and  their  families  in  that  degree  of 
comfort  which  will  maintain  their  efficiency  at  its  maximum 
are  not  allowed  to  accumulate,  they  will  consume  more  than 
is  necessary ;  that  is,  they  will  consume  wastefully.  If  they 
are  allowed  to  accumulate  a  part  of  their  incomes,  some  of 
them  will  be  able  to  accumulate  so  much  that  either  they  or 
their  children  may  live  without  work.  It  is  deemed  better  and 
more  economical  to  allow  them  to  accumulate,  and  then  appeal 
to  them  on  moral  and  religious  grounds  not  to  waste  their  lives 
in  idleness  or  useless  self  amusement,  but  to  use  both  their 
time  and  their  wealth  productively,  than  to  take  away  their 
accumulations  and  thus  encourage  them  to  consume  wastefully. 


70  PRINCIPLES  OF  POLITICAL  ECONOMY 

Let  us  assume,  by  way  of  illustration,  that  two  men,  A  and 
B,  have  equal  incomes,  and  that  their  incomes  are  more  than 
sufficient  to  maintain  them  and  their  families  in  efficient  com- 
fort. A  consumes  his  entire  income  and  never  accumulates 
anything,  while  B  consumes  only  a  part  of  his  income,  invest- 
ing the  remainder  in  productive  enterprises  of  various  kinds. 
The  overconsumption  of  A  and  his  family  accomplishes  noth- 
ing. What  they  consume  over  and  above  that  which  is  neces- 
sary for  efficient  comfort  is  wasted  as  far  as  the  rest  of  the 
country  is  concerned,  and  might  just  as  well  have  been  burned 
or  thrown  into  the  sea  if  that  would  have  given  them  any 
amusement  or  satisfaction.  B's  surplus,  however,  has  gone 
into  the  expansion  of  industries  and  the  increase  of  the  pro- 
ductive power  of  the  country.  Up  to  this  point  B  has  done 
much  better  than  A.  Now  let  us  assume  that  after  a  period 
of  years  B  decides  that  he  has  worked  long  enough,  and  that 
he  will  spend  the  rest  of  his  life  in  sheer  idleness  or  self- 
amusement.  A,  having  accumulated  nothing,  cannot  retire,  but 
is  compelled  to  go  on  working  as  long  as  he  is  able.  From 
this  point  on,  A  is  doing  better  than  B.  During  their  whole 
lives  it  is  difficult  to  say  which  does  the  better,  but  the  odds 
are  slightly  in  favor  of  B.  If,  however,  B  can  be  persuaded 
not  to  remain  idle,  but  to  continue  doing  something  useful, 
even  if  he  does  give  up  his  earlier  business,  the  advantage 
is  decidedly  with  B. 

The  kind  of  talent  that  goes  to  waste.  There  is  one  aspect 
of  the  problem  of  the  leisure  class  which  makes  it  especially 
important.  That  is  the  quality  of  the  people  of  whom  it  is 
made  up.  If  this  class  were  made  up  of  the  ignorant,  the 
weak,  and  the  incompetent,  the  loss  would  not  be  so  great. 
That  part  of  the  leisure  class  which  is  commonly  referred 
to  as  the  tramp,  or  hobo,  class  may  be  thus  described.  There 
is  a  certain  amount  of  waste  involved  here ;  but  as  long  as 
they  do  not  become  a  positive  nuisance  by  their  lawlessness 
and  vagrancy,  the  waste  is  not  so  very  great.  Even  if  they 


MORALS  AND  RELIGION  71 

were  all  at  work,  they  would  not  be  worth  much  ;  consequently 
the  mere  fact  that  they  are  idle  does  not  of  itself  occasion 
much  loss.  Their  criminality  is  of  course  another  matter. 

That  which  is  commonly  known  as  the  leisure  class,  how- 
ever, differs  from  the  vagrant  class  in  at  least  one  important 
particular.  It  is  made  up  in  the  main  of  men  and  women 
of  more  than  average  native  capacity.  The  man,  for  example, 
who  has  been  able  to  accumulate  a  fortune  out  of  his  own 
earnings,  or  by  his  own  business  foresight  and  capacity,  is 
pretty  certain  to  be  a  man  of  considerable  productive  capacity. 
If  he  chooses  to  use  that  capacity  in  productive  enterprises, 
he  can  add  materially  to  the  wealth  and  prosperity  of  the 
whole  community.  If  he  chooses  not  to  use  it,  the  loss  to 
the  community  is  correspondingly  great.  These  considera- 
tions present  a  problem  of  the  very  greatest  magnitude.  The 
greater  the  productive  capacity  of  the  individual,  the  more 
desirable  it  is,  from  the  standpoint  of  national  prosperity,  that 
he  shall  use  that  capacity.  On  the  other  hand,  the  greater 
his  capacity,  the  more  likely  he  is  to  accumulate  a  fortune ; 
and,  consequently,  if  he  is  not  controlled  by  high  moral  and 
religious  motives,  the  more  likely  he  is  to  retire  from  busi- 
ness and  live  in  idleness.  If  he  were  a  man  of  low  productive 
capacity,  it  would  not  be  so  great  a  loss  if  he  were  to  retire ; 
but  such  a  man  will  seldom  be  able  to  accumulate  a  sufficient 
fortune  to  be  able  to  retire. 

Lest  there  should  remain  some  doubt  as  to  whether  it  is 
a  loss  to  society  when  a  man  of  great  capacity  for  usefulness 
stops  working,  let  us  consider  the  case  of  a  great  surgeon. 
The  author  has  such  a  man  in  mind.  He  is  so  skillful  and 
so  capable  that  his  services  are  sought  by  large  numbers  of 
people.  He  could  have  retired  years  ago  and  lived  in  elegant 
leisure  on  his  accumulated  wealth.  Had  he  chosen  to  do  so, 
some  hundreds  of  people  would  have  been  deprived  of  the 
benefit  of  his  skill.  Had  he  been  a  man  of  mediocre  ability, 
it  would  not  have  mattered  much ;  but  a  man  of  mediocre 


72  PRINCIPLES  OF  POLITICAL  ECONOMY 

ability  could  not  have  accumulated  enough  to  be  able  to  stop 
working.  The  fact  that  this  brilliant  surgeon  is  so  much 
needed  is  the  very  thing  which  would  have  made  it  possible, 
if  he  had  been  a  man  of  perverted  morals,  to  stop  working; 
but  that  is  the  very  reason  why  he  should  not  stop.  There 
seems  to  be  no  solution  of  the  problem,  except  sound  moral 
standards  which  will  keep  such  men  busy.  If  they  lack  such 
sound  moral  standards,  even  compulsion  would  not  call  forth 
their  best  efforts.  That  which  has  been  said  of  our  great  surgeon 
may  be  repeated  of  any  great  man  in  any  useful  occupation. 

The  ineffectively  employed.  By  the  ineffectively  employed 
are  meant  all  those  who,  through  lack  of  training,  lack  of  oppor- 
tunity, or  sheer  lack  of  initiative,  are  now  doing  less  useful 
work  than  they  might  have  been  doing  had  they  had  the  proper 
training,  opportunity,  and  initiative.  These  include  men  who 
are  doing  unskilled  work  who  might  have  been  doing  skilled 
work,  men  doing  skilled  manual  work  who  might  have  been 
doing  expert  mental  work,  or  men  doing  routine  mental  work 
who  might  have  been  doing  work  requiring  inventiveness,  origi- 
nality, and  enterprise.  This  is  primarily  an  educational  rather 
than  a  moral  problem.  The  question  of  morals  and  religion 
enters  into  the  problem  to  a  certain  extent,  however.  No  mat- 
ter how  many  and  excellent  are  the  schools  and  other  educa- 
tional opportunities,  unless  students  are  inspired  with  a  high 
purpose  to  make  use  of  the  opportunities  which  are  furnished, 
these  opportunties  alone  will  not  solve  the  problem.  Large 
numbers  will  remain  unskilled,  ignorant,  and  in  a  low  state  of 
productivity.  The  individual  who  remains  less  useful  to  the 
nation  than  he  might  be  is  not  only  doing  himself  an  injury 
but  is  also  injuring  the  nation.  He  who  does  less  well  than 
he  can  does  ill. 

Vice  as  waste  of  energy.  One  very  good  definition  of  a 
vice  is  that  it  is  a  habit  which  wastes  or  dissipates  human 
energy.  It  should,  perhaps,  be  distinguished  from  crime  in  that 
vice  wastes  one's  own  energy,  whereas  crime  wastes  not  only 


MORALS  AND  RELIGION  73 

one's  own  but  that  of  other  people  besides.  No  community 
which  wastes  in  either  way  a  large  proportion  of  its  energy  can 
hope  to  prosper  as  much  as  a  community  which  does  not.  The 
use  of  drugs  which  merely  produce  excitation  or  irritation  of  the 
nerves,  overindulgence  in  any  kind  of  excitement  beyond  what 
is  necessary  for  recreation,  or  even  excessive  devotion  to  sport, 
may  become  a  vice  in  this  sense  as  truly  as  excessive  eating  or 
drinking.  Crime  and  fraud  seem  to  call  for  the  use  of  the 
compulsory  power  of  the  state  rather  than  for  moral  suasion. 
Luxury.  Luxurious  consumption  can  be  controlled  by  au- 
thority and  compulsion  to  a  certain  extent,  but  not  wholly ; 
that  is  to  say,  there  are  certain  clear  and  undebatable  forms 
of  luxurious  consumption,  such  as  the  use  of  alcohol  and 
opium,  which  the  government  can  safely  prohibit,  but  much 
must  be  left  to  the  discretion  of  the  individual.  There  is  a 
time-worn  argument  to  the  effect  that  luxurious  expenditure 
gives  employment  to  labor  and  thus  benefits  the  poor.  This 
is  similar  in  principle  to  the  theory  that  the  destruction  of 
property,  say  the  burning  of  a  building  or  the  breaking  of  a 
window,  gives  employment  to  labor.  The  stupidity  of  this  argu- 
ment was  never  more  clearly  shown  than  by  Frederic  Bastiat 
in  his  famous  work  entitled  "  Sophisms  of  Political  Economy." 
He  pictures  a  shopkeeper  who  is  about  to  chastise  a  scapegrace 
son  who  has  broken  a  pane  of  glass.  Some  sympathetic  by- 
standers argue  that  the  boy  is  really  a  public  benefactor  in 
that  he  has  made  work  for  the  glazier,  who  will  then  have  six 
francs,  the  cost  of  a  new  pane,  to  spend,  and  that  the  butcher, 
the  baker,  and  others  will  share  in  the  benefit. 

"  Assuming  that  it  becomes  necessary  to  spend  six  francs  in  repairing  the 
damage,  if  you  mean  to  say  that  the  accident  brings  in  six  francs  to  the 
glazier,  and  to  that  extent  encourages  his  trade,  I  grant  it  fairly  and  frankly, 
and  admit  that  you  reason  justly. 

"  The  glazier  arrives,  does  his  work,  pockets  his  money,  rubs  his  hands, 
and  blesses  the  scapegrace  son.  That  is  what  we  see. 

"  But  if,  by  way  of  deduction,  you  come  to  conclude,  as  is  too  often  done, 
that  it  is  a  good  thing  to  break  windows,  that  it  makes  money  circulate,  and 


74  PRINCIPLES  OF  POLITICAL  ECONOMY 

that  encouragement  to  trade  in  general  is  the  result,  I  am  obliged  to  cry, 
halt !  Your  theory  stops  at  what  we  see,  and  takes  no  account  of  what  we 
don't  see. 

"  We  don't  see  that  since  our  burgess  has  been  obliged  to  spend  his  six 
francs  on  one  thing,  he  can  no  longer  spend  them  on  another. 

"  We  don't  see  that  if  he  had  not  this  pane  to  replace,  he  would  have 
replaced,  for  example,  his  shoes,  which  are  down  at  the  heels ;  or  have 
placed  a  new  book  on  his  shelf.  In  short,  he  would  have  employed  his 
six  francs  in  a  way  in  which  he  cannot  employ  them  now.  Let  us  see  then 
how  the  account  stands  with  trade  in  general.  The  pane  being  broken, 
the  glazier's  trade  is  benefited  to  the  extent  of  six  francs.  That  is  what 
we  see. 

"  If  the  pane  had  not  been  broken,  the  shoemaker's  or  some  other  trade 
would  have  been  encouraged  to  the  extent  of  six  francs.  That  is  what  we 
don't  see.  And  if  we  take  into  account  what  we  don't  see,  which  is  a  nega- 
tive fact,  as  well  as  what  we  do  see,  which  is  a  positive  fact,  we  shall  dis- 
cover that  trade  in  general,  or  the  aggregate  of  national  industry,  has  no 
interest,  one  way  or  the  other,  whether  windows  are  broken  or  not. 

"  Let  us  see,  again,  how  the  account  stands  with  Jacques  Bonhomme. 
On  the  last  hypothesis,  that  of  the  pane  being  broken,  he  spends  six 
francs,  and  gets  neither  more  nor  less  than  he  had  before,  namely,  the  use 
and  enjoyment  of  a  pane  of  glass.  On  the  other  hypothesis,  namely,  that 
the  accident  had  not  happened,  he  would  have  expended  six  francs  on 
shoes,  and  would  have  had  the  enjoyment  both  of  the  shoes  and  the  pane 
of  glass. 

"  Now  as  the  good  burgess,  Jacques  Bonhomme,  constitutes  a  fraction  of 
society  at  large,  we  are  forced  to  conclude  that  society,  taken  in  the  aggre- 
gate, and  after  all  accounts  of  labor  and  enjoyment  have  been  squared,  has 
lost  the  value  of  the  pane  which  has  been  broken." 

In  one  respect  the  argument  against  luxury  is  less  strong 
than  that  against  the  breaking  of  a  pane  of  glass,  but  in  an- 
other respect  it  is  stronger.  When  the  shopkeeper  in  the  story 
has  to  spend  six  francs  on  a  pane  of  glass,  he  gets  no  satis- 
faction out  of  it  and  deprives  himself  of  a  pair  of  shoes 
which  he  needs.  Had  he  spent  the  six  francs  on  a  luxury, 
he  would  presumably  have  got  some  enjoyment  out  of  it, 
even  though  it  had  been  followed  by  indigestion  or  a  head- 
ache. To  this  extent  it  would  have  been  better  to  have  a 
luxury  costing  six  francs  than  to  have  been  compelled,  through 


75 

the  carelessness  of  an  overexuberant  son,  to  spend  that  amount 
on  a  pane  of  glass.  On  the  other  hand,  when  one  compares 
the  expenditure  of  money  for  a  luxury  with  the  investment 
of  money  in  tools  or  other  instruments  of  production,  one 
does  not  get  so  favorable  a  picture.  When  one  spends  money 
for  a  luxury,  one  does,  it  is  true,  set  labor  to  work,  in  a 
luxury-producing  industry ;  but  if  one  were  to  spend  the 
same  amount  of  money  for  tools,  one  would  set  an  equal 
quantity  of  labor  to  work  in  a  tool-producing  industry.  It  is 
at  least  as  desirable  to  give  work  to  toolmakers  as  to  luxury 
producers.  In  fact,  it  is  much  more  desirable.  The  more 
men  there  are  working  in  tool-making  industries,  the  better 
supplied  with  tools  the  nation  will  be.  The  way  they  are  set 
to  work  is  by  the  purchase  of  tools ;  that  is,  by  the  investment 
of  money  in  tools. 

If  you  have  a  dollar  to  spend  over  and  above  what  is  neces- 
sary to  maintain  you  in  efficient  comfort,  you  have  your  choice 
of  spending  it  on  some  unnecessary  article  of  consumption  or 
of  investing  it  in  some  productive  enterprise.  Whether  it  be 
a  dollar  or  a  hundred  thousand  dollars,  the  principle  is  the 
same.  If  you  decide  to  invest  your  money  in  a  productive 
enterprise,  you  tend,  to  the  extent  of  your  investment,  to  set 
labor  to  work  erecting  the  buildings  or  manufacturing  the 
machines  which  will  be  needed  in  production.  The  more 
people  there  are  who  are  investing  in  this  way,  and  the  more 
they  invest,  the  more  productive  enterprises  we  shall  have. 
This  not  only  sets  labor  to  work  preparing  the  buildings  and 
machinery,  but  will  continue  to  employ  labor  to  run  the  enter- 
prises. Again,  as  a  result  of  this,  more  goods  are  produced 
and  the  nation  is  better  fed,  clothed,  and  supplied  with  all 
necessaries.  It  is  therefore  very  much  better  that  there  should 
be  a  great  many  people  investing  their  money  productively 
than  that  they  should  merely  spend  their  money  for  extrava- 
gant luxuries  which  are  of  no  use  to  anyone  except  themselves. 
He  who  does  less  well  with  his  money  than  he  might  do  is 


76  PRINCIPLES  OF  POLITICAL  ECONOMY 

doing  badly.  He  therefore  does  badly  who  spends  his  money 
luxuriously  when  he  might  invest  it  productively. 

Emulation  in  extravagance.  Nothing  could  contribute  more 
to  the  general  prosperity  and  well-being  of  the  nation  than 
such  moral  habits  as  would  discourage  extravagant  consumption 
and  encourage  thrift  and  wise  investments  in  all  sorts  of  pro- 
ductive enterprises.  A  particularly  vicious  and  wasteful  factor 
in  many  a  social  group  is  competition  or  emulation  in  extrava- 
gance. What  Professor  Thorstein  Veblen1  has  called  "con- 
spicuous waste  "  is  sometimes  required  of  everyone  with  social 
ambitions.  Of  all  forms  of  competition,  competitive  consump- 
tion is  the  most  pernicious  and  wasteful.  When  men  and 
women  try  to  advertise  their  solvency  by  ostentatious  waste- 
fulness, there  develops  a  real  competition  to  see  who  can 
advertise  most  effectively. 

This  is  part  of  a  very  widespread  tendency.  Certain  Chinese 
mandarins  of  an  older  day  used  to  allow  their  finger  nails  to 
grow  to  inordinate  lengths  as  a  visible  sign  that  they  did  not 
have  to  work.  The  binding  of  the  feet  of  women  served 
much  the  same  purpose.  Where  work  is  not  regarded  as 
respectable,  some  visible  sign  of  respectability  is  generally 
sought.  Sometimes  these  customs  are  copied  even  by  those 
who  do  have  to  work,  as  in  the  case  of  high-heeled  shoes 
and  of  long  trains. 

Emulation  in  the  waste  of  physical  energy.  It  is  not  only 
the  possession  of  plenty  of  money  which  is  thus  vulgarly 
advertised.  The  possession  of  abounding  physical  energy  is 
also  advertised  by  the  practice  of  conspicuous  vices  which  tend 
to  dissipate  energy.  The  young  man  who  can  dissipate  freely 
can  thus  advertise  to  the  world  that  he  has  health  and  energy 
to  spare,  just  as  he  can  advertise  to  the  world  that  he  has 
money  to  spare  when  he  spends  it  extravagantly.  When  there 
is  no  sense  of  moral  values  and  no  sober  self-restraint,  the 
possession  of  abundant  health  and  the  possession  of  abundant 

1  The  Theory  of  the  Leisure  Class. 


MORALS  AND  RELIGION  77 

money  lead  to  equally  demoralizing  vices.  The  poor  are  safe- 
guarded by  their  poverty  from  the  extravagant  use  of  money, 
but  they  are  quite  as  likely  to  indulge  in  the  extravagant  uses 
of  vitality  as  are  the  rich.  If  there  be  any  difference,  the 
dissipation  of  physical  energy  is  worse  than  the  dissipation 
of  money. 

The  teacher,  the  preacher,  or  the  moral  leader  who  can 
persuade  the  people  to  abandon  such  habits  and  use  their 
surplus  money  and  their  surplus  energy  productively  rather 
than  wastefully  will  deserve  to  stand  among  the  greatest  of 
statesmen  and  nation  builders.  Nations  are  built  by  the  wise 
expenditure  of  human  energy.  The  less  it  is  wasted,  and  the 
more  it  is  used  up  in  production  or  useful  work,  the  greater 
the  progress  of  the  nation. 

We  have  chosen  to  discuss,  in  this  chapter,  a  theme  which 
is  not  ordinarily  treated  in  works  on  economics.  It  has  gener- 
ally been  assumed  that  economics  had  nothing  to  do  with 
morals  and  religion.  With  certain  sentimental  and  conventional 
aspects  of  these  human  interests,  perhaps  the  economist  has 
nothing  to  do.  But  in  so  far  as  they  are  factors,  or  may  be- 
come factors,  in  national  wealth,  prosperity,  and  power,  noth- 
ing can  be  of  more  interest  to  the  economist.  Even  religion, 
if  it  stimulates  the  productive  virtues  and  discourages  the  vices 
which  waste  and  dissipate  human  energy,  may  become  one  of 
the  greatest  factors  in  the  building  of  a  great,  prosperous,  and 
powerful  nation.  The  nation  which  possesses  such  a  religion 
will  eventually  outgrow  in  all  these  particulars  the  nation 
which  does  not,  or  which  possesses  a  religion  which  enervates, 
which  lulls  to  sleep,  or  which  represses  the  productive  virtues.1 

1  For  a  fuller  discussion  of  this  topic,  see  the  author's  book  entitled  "  The 
Religion  Worth  Having."  Houghton  Mifflin  Company,  Boston,  1912. 


CHAPTER  VII 

THE  GEOGRAPHICAL  SITUATION 

The  human  factor  is  the  most  important  factor  in  national 
prosperity.  Nevertheless,  the  natural  situation  is  a  factor  which 
must  be  taken  into  consideration.  However  gifted  and  coura- 
geous a  race  may  be,  it  will  find  it  easier  to  expand  and  become 
prosperous,  powerful,  and  great  in  a  favorable  than  in  an 
unfavorable  environment. 

Importance  of  environment.  But  what  is  a  favorable  envi- 
ronment ?  It  is  easy  to  overemphasize  the  bodily  comfort  of 
living  in  a  warm  as  opposed  to  a  hot  or  a  cold  climate,  and 
to  ignore  the  bracing  effects  of  changeable  weather.  It  is  also 
easy  to  overemphasize  the  tremendous  productivity  of  certain 
tropical  regions  and  to  forget  that  they  produce  the  enemies 
as  well  as  the  friends  of  man  in  great  profusion.  It  is  equally 
easy  to  go  too  far  in  the  opposite  direction  and  to  hold  that 
hard  conditions,  such  as  a  harsh  climate  and  a  sterile  soil,  are 
best  for  man's  development.  If  hard  conditions  are  all  that 
men  need,  the  Eskimos  of  the  Far  North  are  peculiarly  blest. 

If  we  take  everything  into  consideration,  it  is  probable  that 
the  temperate  zones  are  most  favorable  to  man's  development 
as  well  as  to  his  prosperity.  He  has  here  fewer  unconquerable 
enemies  than  in  the  tropics  or  in  the  frigid  zones.  He  finds 
a  wider  variety  of  useful  materials,  such  as  grass,  timber,  and 
minerals,  and  he  finds  them  in  greater  abundance  here  than 
elsewhere.  Here  the  advantages  to  be  gained  by  work  are 
more  obvious  and  more  easily  comprehended  by  the  average 
intellect  than  anywhere  else.  The  intelligence  required  to  see 
the  advantage  of  building  shelters,  making  clothing,  and 
kindling  fires,  especially  in  a  place  where,  along  with  the  cold 


THE  GEOGRAPHICAL  SITUATION  79 

weather,  there  is  an  abundance  of  suitable  material,  is  not  very 
great.  It  requires  much  more  scientific  knowledge  to  enable 
men  to  guard  against  the  hookworm  and  the  various  harmful 
bacteria  which  infest  the  tropics.  These,  together  with  veno- 
mous insects  and  reptiles,  not  to  mention  the  larger  beasts  of 
prey,  imperil  the  lives  of  the  dwellers  in  the  tropics  quite  as 
much  as  our  cold  winters  imperil  the  lives  of  dwellers  in  these 
northern  latitudes. 

Northern-grown  crops  are  generally  best.  It  is  a  fact  of 
observation,  however  we  may  account  for  it,  that  many  of  our 
farm  crops  reach  their  highest  perfection  very  near  the  northern 
limits  of  the  areas  within  which  they  can  be  grown  without 
injury  from  frost.  The  cotton  belt  of  this  country,  though 
confined  to  the  southern  states,  is  in  reality  near  the  northern 
limit  for  cotton.  Our  corn  belt  is  likewise  near  the  northern 
limit  for  corn.  The  oranges  of  California  and  Florida  are 
likewise  grown  near  the  line  where  frost  will  destroy  the  crop. 
The  potato  and  the  sugar  beet  do  better  either  in  high  altitudes 
or  high  latitudes,  where  the  summers  are  barely  warm  enough 
and  the  seasons  barely  long  enough  to  mature  the  crop.  One 
explanation  of  this  general  rule  is  that  by  migrating  northward 
a  plant  escapes  many  of  its  ancient  and  hereditary  enemies. 
When  seed  corn  is  saved,  dried,  and  protected  during  the 
winter,  and  special  care  given  it  during  the  growing  season, 
it  can  grow  farther  north  than  would  be  possible  if  it  had  to 
shift  for  itself.  Its  natural  enemies  in  its  original  habitat,  not 
having  man's  help,  cannot  live  over  winter  or  mature  between 
frosts  in  our  corn  belt.  Therefore  the  corn  plant  escapes 
some  of  its  worst  enemies.  The  same  is  true  of  the  cotton 
plant  (though  some  of  its  ancient  enemies  seem  to  be  following 
it  northward)  and  also  of  other  plants  which  seem  to  flourish 
under  cultivation  in  latitudes  where  they  could  not  survive 
without  cultivation.  Similarly,  when  man  learns  to  keep  him- 
self warm  by  building  houses,  manufacturing  clothing,  and 
making  fires,  he  can  live  in  latitudes  which  enable  him  to 


80  PRINCIPLES  OF  POLITICAL  ECONOMY 

escape  some  of  his  ancient  and  hereditary  enemies,  such  as  the 
hookworm  and  the  germs  of  yellow  fever,  malaria,  etc.  The 
northern  limit  of  his  best  development,  however,  must  coin- 
cide with  the  northern  limits  of  the  production  of  abundant 
means  of  satisfying  his  multifarious  desires.  Another  expla- 
nation is  that  during  the  growing  season  for  plants,  that  is, 
during  the  summer,  the  days  are  longer  in  high  than  in  low 
latitudes.  This  gives  plants  more  light  while  they  are  growing. 
The  proportion  of  sugar  in  sugar  beets  seems  to  depend  upon 
the  amount  of  sunlight  which  they  get  while  they  are  growing. 

Buckle's  generalizations.  In  his  famous  work,  "  The  History 
of  Civilization  in  England,"  Henry  Thomas  Buckle  makes  a 
great  deal  of  several  other  factors  in  the  geographical  situa- 
tion. These  he  groups  under  four  heads,  namely,  climate,  food, 
soil,  and  the  general  aspect  of  nature.  He  goes  to  the  extreme 
of  attributing  to  these  factors  a  controlling  influence  not  only 
on  the  economic  prosperity  of  the  people  but  even  on  their 
intellectual,  moral,  and  religious  development  as  well.  With- 
out following  him  to  these  extremes,  we  may  profitably  give 
attention  to  some  of  his  observations  regarding  the  influence 
exercised  by  these  factors  on  the  industrial  development  of  a 
people.  No  one  is  likely  to  deny  that  the  presence  of  cheap  coal 
has  had  a  great  deal  to  do  with  the  economic  development  of 
Europe  and  America,  or  that  the  former  abundance  of  timber 
in  this  country  had  a  great  deal  to  do  with  the  kind  of  houses 
we  built  and  are  still  building.  A  shingled  roof,  for  example,  is 
unknown  except  in  countries  where  timber  has  been  abundant. 

That  ancient  civilizations  arose  in  regions  where  labor 
applied  to  land  was  highly  productive  is  a  commonplace  in 
history.  The  fertile  river  valleys  of  Egypt,  Mesopotamia,  India, 
and  China  supported  civilizations  when  our  European  ancestors 
were  still  savages.  Here  food  was  so  abundant  that  men 
had  time  to  do  other  things  besides  satisfying  their  imme- 
diate daily  needs ;  or,  rather,  a  part  of  the  population  could 
produce  food  enough  to  support  the  rest  while  the  latter  gave 


THE  GEOGRAPHICAL  SITUATION  81 

their  time  to  other  things.  Art,  architecture,  philosophy,  reli- 
gion, and  government  could  therefore  flourish.  The  civiliza- 
tions which  have  since  grown  up  in  latitudes  farther  north 
may  not  have  exceeded  those  earlier  civilizations  in  physical 
magnificence,  but  they  have  exceeded  them  in  all  that  makes 
for  the  comfort  and  well-being  of  the  average  man. 

On  the  other  hand,  the  overpowering  influence  of  the  terrific 
productiveness  of  nature  in  certain  tropical  regions  is  sufficient 
to  discourage 'man's  enterprise.  Kipling's  story  entitled  "Let- 
ting in  the  Jungle  "  1  gives  a  vivid  picture  of  the  way  in  which 
the  jungle  struggles  to  reassert  itself,  —  to  flow  back,  as  it 
were,  upon  a  cleared  area,  and  overwhelm  it  as  with  a  flood  of 
rank  vegetation.  Concerning  India,  Buckle  writes : 

Besides  the  dangers  incidental  to  tropical  climates,  there  are  those  noble 
mountains  which  seem  to  touch  the  sky,  and  from  whose  sides  are  dis- 
charged mighty  rivers  which  no  art  can  divert  from  their  course  and  which 
no  bridge  has  ever  been  able  to  span.  There,  too,  are  impassable  forests, 
whole  countries  lined  with  interminable  jungle,  and  beyond  them,  again, 
dreary  and  boundless  deserts,  —  all  teaching  man  his  own  feebleness  and 
his  inability  to  cope  with  natural  forces.  Without,  and  on  either  side,  there 
are  great  seas,  ravaged  by  tempests  far  more  destructive  than  any  known 
in  Europe,  and  of  such  violence  that  it  is  impossible  to  guard  against  their 
effects.  And  as  if  in  those  regions  everything  combined  to  cramp  the 
activity  of  man,  the  whole  line  of  coast  from  the  mouth  of  the  Ganges  to 
the  extreme  south  of  the  peninsula  does  not  contain  a  single  safe  and  capa- 
cious harbor,  not  one  port  that  affords  a  refuge  which  is  perhaps  more 
necessary  there  than  in  any  other  part  of  the  world. 

In  contrast  to  India,  Buckle  points  to  Greece  as  a  country 
where  everything  invites  man  to  dominate.  There  is  nothing 
to  terrify  or  overwhelm  him.  Everything  tends  to  exalt  the 
dignity  of  man,  while  in  India  everything  tends  to  depress  it. 

The  zone  of  the  founders  of  religion.  Peschel,  in  his  "  Races 
of  Man  "  quotes  from  an  old  Arabian  geographer  who  divided 
the  earth  into  zones,  one  of  which,  that  between  19°  and  33° 
49'  north  latitude,  was  the  zone  of  the  founders  of  religion. 

1  In  "The  Second  Jungle  Book." 


82  PRINCIPLES  OF  POLITICAL  ECONOMY 

He  points  out  that  in  this  zone  were  born  all  the  great  founders 
of  religion  and  all  the  philosophers  and  scholars,  himself  in- 
cluded. Zoroaster,  Moses,  Buddha,  Christ,  and  Mohammed 
were  all  born  in  that  zone.  Regarding  the  influence  of  the 
desert  upon  the  mind,  Peschel  writes : 

All  who  have  been  in  the  desert  extol  its  beneficent  influence  on  the 
health  and  spirits.  Aloys  Sprenger  declares  that  the  air  of  the  desert 
invigorated  him  more  than  that  of  the  high  Alps  or  of  the  Himalayas.  .  .  . 
The  desert  has  impressed  the  Arabs  with  their  remarkable  historical  char- 
acter. In  the  boundless  plains  the  imagination  which  guides  the  youth  of 
men  is  filled  with  images  quite  different  from  those  suggested  by  forest 
country.  The  thoughts  thus  acquired  are  noble  rather  than  numerous.  .  .  . 
Every  traveler  who  has  crossed  the  deserts  of  Arabia  and  Asia  Minor 
speaks  enthusiastically  of  their  beauties.  All  praise  their  atmosphere  and 
brightness  and  tell  of  a  feeling  of  invigoration  and  a  perceptible  increase  of 
intellectual  elasticity ;  hence,  between  the  arched  heavens  and  the  unbounded 
expanse  of  plain,  a  monotheistic  frame  of  mind  necessarily  steals  upon  the 
children  of  the  desert. 

Professor  Ellsworth  Huntingdon,1  on  the  other  hand,  finds 
greater  stimulus  to  mental  activity  in  a  changeable  climate  with 
frequent  variations  of  temperature. 

The  geographical  advantages  of  the  United  States.  Coming 
to  our  own  country,  we  have  a  combination  of  most  of  the 
geographical  factors  mentioned  by  Buckle  and  others.  We 
have  the  broken  landscape,  low  mountain  ranges,  and  small 
rivers  of  the  Atlantic  seaboard.  The  great  fertile  valley  of 
the  Mississippi  and  its  tributaries,  the  vast  plains  of  the  great 
West,  the  semidesert  conditions  of  the  Southwest,  the  tower- 
ing mountain  ranges  of  the  Rockies  and  the  Sierras,  and  the 
mild  climate  and  gentle  slopes  of  the  Pacific  coast.  If  the 
mind  of  man  is  strongly  influenced  by  its  geographical  sur- 
roundings, we  have  an  opportunity  of  developing  a  many-sided 
and  variegated  civilization. 

1  The  Pulse  of  Asia.  See  also  "  Climatic  Changes  and  Agricultural  Exhaus- 
tion as  Elements  in  the  Fall  of  Rome,"  Quarterly  Journal  of  Economics, 
February,  1917. 


THE  GEOGRAPHICAL  SITUATION  83 

The  eastern  half  of  the  United  States,  being  virtually  sur- 
rounded on  three  sides  by  water,  like  the  greater  part  of 
Europe,  is  assured  of  an  adequate  quantity  of  moisture.  The 
western  half  is  more  or  less  deficient  in  moisture,  except  the 
extreme  northwest  corner  and  certain  high  mountain  altitudes. 
These  arid  and  semiarid  regions,  where  the  streams  do  not 
supply  water  enough  for  irrigation,  may,  in  places  where  con- 
ditions are  favorable,  be  made  to  grow  crops  under  methods 
known  as  dry  farming.  The  rest  will  probably  be  a  perma- 
nent grazing  country.  Even  our  irrigable  land,  while  but  a 
fraction  of  the  total,  amounts  to  a  small  empire  in  itself. 

A  broad  strip  running  from  the  Atlantic  seaboard  to  the 
hundredth  meridian,  and  a  little  north  of  the  middle,  com- 
prises the  great  grain,  hay,  and  livestock  region.  Another 
broad  strip,  lying  south  of  this,  is  the  cotton  belt.  Along  our 
northern  border  from  Maine  to  northern  New  York  is  a  lum- 
ber, dairy,  and  potato  region,  and  a  natural  summer  play- 
ground for  the  city  people.  A  continuation  of  this  strip, 
including  the  northern  halves  of  Michigan,  Wisconsin,  and 
Minnesota,  is  an  undeveloped  region,  formerly  covered  with 
forest  but  now  largely  cut  over.  Most  of  it  is  excellent  land 
for  potatoes  and  small  grains,  and  is  capable  of  feeding  a 
vast  population.  Another  undeveloped  strip  along  the  Gulf 
coast  from  Florida  to  Texas,  just  south  of  the  cotton  belt,  is 
also  largely  cut-over  timber  land.  Much  of  this  is  ideal  land 
for  fruit  and  truck  farming  and  the  growing  of  such  great 
food  crops  as  sweet  potatoes  and  peanuts.  Whenever  the  de- 
mand for  food  is  such  as  to  insure  a  remunerative  price  for 
potatoes,  both  white  and  sweet,  almost  unimaginable  quanti- 
ties can  be  grown  along  our  northern  and  southern  borders 
without  interfering  with  the  growing  of  corn,  wheat,  or  cotton 
in  the  belts  which  are  especially  adapted  to  these  great  crops. 
So  far  as  starchy  food  is  concerned,  we  have  opportunities  for 
producing  incalculable  quantities.  Animal  products  also  can 
be  produced  in  quantities  sufficient  for  a  population  very  much 


84  PRINCIPLES  OF  POLITICAL  ECONOMY 

greater  than  the  present,  though  it  is  easy  for  unthinking 
people  greatly  to  exaggerate  the  possibilities  in  this  direction. 

The  Mississippi  Valley,  that  is,  the  whole  interior  basin  of 
the  country,  is  one  of  the  most  productive  regions  in  the 
entire  world.  In  fact,  it  is  doubtful' if  any  region  of  equal 
area  can  be  found  anywhere  on  the  globe  which  contains  so 
great  a  variety  and  abundance  of  natural  riches,  both  on  the 
surface  and  beneath  the  surface.  This  region  includes  the 
greater  part  of  our  cotton  belt,  and  we  produce  nearly  three 
fourths  of  the  cotton  of  the  world.  It  includes  all  of  what  is 
known  as  our  corn  belt ;  that  is,  the  region  where  corn  is  the 
main  crop,  though  corn  is  grown  in  every  state  in  the  Union. 
Corn  is  not  only  our  most  valuable  crop  but  our  most  valuable 
single  product  of  any  kind  or  description  ;  we  also  grow  nearly 
three  fourths  of  the  world's  production  of  this,  the  most  magnifi- 
cent of  all  crops.  In  this  region  are  also  the  great  spring-wheat 
areas  of  Minnesota  and  the  Dakotas  and  the  winter- wheat  area 
extending  from  Ohio  to  the  Great  Plains,  reaching  its  greatest 
density  in  Kansas  and  Nebraska.  While  we  produce  on  the 
average  only  between  a  fourth  and  a  third  of  the  world's  total 
wheat  crop,  we  yet  produce  more  than  any  other  single  country, 
Russia  being  the  only  close  competitor.  Aside  from  these  major 
crops,  this  region  is  also  rich  in  a  number  of  minor  crops  and 
grows  practically  everything  which  will  grow  outside  the  tropics. 

Farm  machinery.  The  reasons  for  this  great  productivity 
are  first,  the  vast  area ;  second,  the  uniform  fertility  of  the 
soil ;  third,  the  uniformly  level  contour,  making  farm  opera- 
tions relatively  easy  and  inexpensive ;  fourth,  the  uniformly 
favorable  climate ;  and,  fifth,  the  general  use  of  farm  ma- 
chinery. There  is  probably  no  single  area  in  the  world  where 
so  much  and  such  efficient  farm  machinery  is  used  in  order  to 
supplement  the  labor  of  men. 

In  addition  to  the  natural  ingenuity  of  our  people,  the  gen- 
eral smoothness  of  the  land  and  the  favorableness  of  the 
climate  must  be  held  to  account  for  the  use  of  farm  machinery. 


THE  GEOGRAPHICAL  SITUATION  85 

The  summers  (especially  the  late  summer  months)  in  this 
region  are  relatively  dry.  This  has  had  an  important  effect  in 
encouraging  the  use  of  harvesting  and  hay-making  machinery. 
In  some  of  the  countries  of  northwestern  Europe,  where  clear, 
dry  weather  is  rare,  the  curing  of  hay  and  the. drying  of  har- 
vested grain  are  more  difficult  problems  than  with  us.  The 
quick  curing  and  rapid  methods  of  harvesting  and  storing 
which  are  familiar  to  us  are  there  impossible. 

Mineral  wealth.  Beneath  the  soil  in  this  region  lies  a  wealth 
of  minerals.  Bituminous  coal  underlies  a  great  deal  of  it  from 
western  Pennsylvania  to  Wyoming.  Petroleum  and  natural 
gas  abound  in  the  same  region,  and  fields  extend  southward 
to  the  Gulf.  Some  of  the  richest  and  most  extensive  beds  of 
iron  in  the  world  lie  in  northern  Michigan  and  Minnesota. 

Throughout  this  region  transportation  is  easy.  The  Great 
Lakes  furnish  cheap  water  transportation,  as  do  (to  a  less 
extent)  the  Mississippi  and  its  larger  tributaries.  But  its 
greatest  advantage  for  transportation  is  its  wide  extent  and 
its  level  contour,  making  railroad  building  and  operation 
relatively  inexpensive. 

Bordering  on  this  vast  region,  which  must  more  and  more 
become  the  real  home  and  habitat  of  the  American  people,  are 
the  Atlantic  and  Pacific  seaboards,  adding  other  mineral  wealth, 
forests,  water  power,  fisheries,  and  opportunities  for  foreign 
trade  to  the  wealth-producing  power  of  the  whole.  In  view  of 
all  these  natural  riches,  it  is  obvious  that  if  the  American  peo- 
ple do  not  prosper  and  grow  in  all  the  arts  of  civilization,  it 
will  be  their  own  fault.  Nature  has  done  a  great  deal  for  us. 
It  remains  to  be  seen  what  we  can  do  for  ourselves. 

Reasons  for  modesty  as  well  as  for  pride.  A  great  railroad 
president  used  to  make  it  a  rule  never  to  promote  anyone  who 
was  satisfied  with  his  own  work.  The  fact  that  he  was  satisfied 
argued  that  the  person  in  question  did  not  have  very  high 
standards  of  excellence,  if  he  could  be  satisfied  with  anything 
that  he  had  done.  The  people  of  America  may  well  take 


86  PRINCIPLES  OF  POLITICAL  ECONOMY 

warning  from  the  observation  of  this  wise  man  of  business. 
If  we  are  satisfied  with  what  we  have  done,  it  means  that  we 
have  no  very  high  standards  of  national  life  and  efficiency, 
and  that  our  progress  is  at  an  end.  Before  we  take  too  much 
credit  for  our  national  wealth  and  prosperity,  we  should  ask 
ourselves  to  what  extent  we  did  it,  and  to  what  extent  nature 
did  it  for  us.  It  will  be  a  wholesome  exercise  for  us  to  write 
down  a  list  of  achievements  in  which  we  have  led  the  world, 
and  then  to  ascertain  to  what  extent  these  are  .due  to  our  own 
^intelligence,  energy,  courage,  and  devotion  to  ideals,  and  to 
what  extent  to  our  favorable  geographical  situation  and  the 
richness  of  our  resources. 

We  produce  more  iron  and  steel,  more  corn,  cotton,  and 
wheat,  than  any  other  country.  There  are  excellent  geographi- 
cal reasons  why  we  should.  Mechanical  inventions  and  the 
breeding  of  the  trotting  horse  are  among  the  few  activities 
in  which  we  have  surpassed  other  people  without  the  special 
aid  of  superior  physical  advantages. 


PART  TWO 
PRODUCTION 

Which  has  to  do  with  the  adding  of  utility  to  material  things,  that  is, 

with  changing  the  forms  of  matter,  with  changing  its  location,  and  with 

preserving  it  over  longer  or  shorter  periods  of  time,  all  for  the  purpose  of 

making  it  more  useful,  or  of  adding  utility  to  it 


SECTION  A 

THE  PRODUCTIVE  FORCES 

The  forces  by  means  of  which  we  increase  the  number  of  desirable  things, 
or  increase  the  desirability  of  things 


ss 


CHAPTER  VIII 
.    THE  PRIMARY  FACTORS  OF  PRODUCTION 

However  strongly  we  believe  that  this  is  the  best  possible 
world,  and  however  clearly  we  see  that  a  bounteous  nature 
has  provided  for  the  satisfaction  of  many  of  our  needs,  we 
cannot  help  acknowledging  that,  at  any  time  and  in  any  place 
where  we  happen  to  be,  some  desirable  things  are  scarce, 
some  undesirable  things  are  abundant,  and  some  things  other- 
wise desirable  are  so  superabundant  as  to  become  undesirable. 
That  being  the  case,  the  obvious  thing  to  do  seems  to  be  to 
set  about  improving  the  situation,  increasing  the  quantity  of 
those  desirable  things  which  are  scarce,  and  decreasing  the 
quantity  of  those  things  which  are  too  abundant  for  our 
well-being  or  comfort. 

The  rearrangement  of  matter.  Matter  itself  cannot,  of  course, 
be  either  increased  or  diminished  in  quantity.  It  can  be  re- 
arranged in  such  ways  as  to  become  more  usable  or  less  harm- 
ful. This  rearrangement  may  take  on  various  forms.  All  the 
elements  which  are  now  in  a  loaf  of  bread  were  formerly  in 
the  soil,  the  water,  and  the  atmosphere.  In  those  forms  they 
were  of  no  use  to  man.  They  have  been  rearranged  and  as- 
sembled, —  their  form  has  been  changed.  This  is  sometimes 
called  form-utility.  The  wheat  from  which  the  flour  was  made, 
and  the  flour  from  which  the  bread  was  made,  had  to  be 
transported  from  places  where  there  was  a  superabundance  to 
a  place  where  there  was  a  scarcity,  in  order  that  they  might 
become  usable.  This  is  sometimes  called  place-utility.  Some 
goods  have  to  be  stored  and  preserved.  At  one  time  they 
are  so  abundant  as  to  be  unusable.  At  another  time,  unless 
they  were  preserved,  they  would  be  so  scarce  as  to  cause 

89 


90  PRINCIPLES  OF  POLITICAL  ECONOMY 

hardship  or  even  famine.  Their  utility  is  increased  by  storing 
and  preserving  them.  This  is  sometimes  called  time-utility. 

A  keen  observer  has  remarked  that  men  are  engaged  in 
the  simple  work  of  moving  things  from  one  place  to  another. 
Whether  one  is  writing  with  a  pen,  putting  chemicals  into  a 
test  tube,  or  irrigating  dry  land,  all  that  men  literally  do  is  to 
move  materials.  Of  course,  there  are  methods  and  purposes 
in  all  this  moving  of  things.  It  is  method  and  purpose  which 
the  mind  sees  back  of  that  which  the  eye  sees,  and  which 
the  mind  performs  beyond  that  which  the  muscles  perform. 
One  of  the  wonderful  things  about  man's  activity  is  the  vast 
results  that  follow  a  very  slight  rearrangement  of  materials. 
By  stirring  the  soil  and  placing  seeds  in  a  certain  relation  to 
it  the  forces  which  produce  plant  growth  are  set  to  work 
supplying  our  needs.  By  rearranging  a  few  stones  and  clods 
a  stream  may  be  diverted  and  made  to  water  barren  fields 
until  they  blossom  and  bear  fruit ;  or  the  stream  may  be 
made  to  turn  a  wheel  and  drive  machinery  which  can  accom- 
plish tasks  far  too  great  for  human  muscles.  By  taking  advan- 
tage of  his  knowledge  man  can,  by  these  slight  rearrangements 
of  matter,  harness  natural  forces  and  compel  them  to  serve 
his  purpose. 

Discriminating  between  friends  and  enemies.  The  general 
purpose  of  all  this  work  is  to  increase  the  objects  of  desire 
and  decrease  the  objects  of  repugnance.  The  process  of  in- 
creasing the  objects  of  desire  is  called  production,  and  that  of 
decreasing  the  objects  of  repugnance  is  called  destruction.  Fre- 
quently these  two  processes  are  so  closely  related  as  to  make 
them  difficult  to  separate.  In  order  to  increase  the  number 
of  desirable  plants,  we  must  destroy  their  rivals,  the  weeds, 
as  well  as  the  pests  which  feed  upon  them.  Out  of  the  various 
forms  of  animal  and  plant  life  which  would  live  in  our  neigh- 
borhood, we  choose  the  more  desirable  and  make  it  easy  for 
them  to  live  and  multiply,  and  make  it  hard  for  the  less  desir- 
able to  survive.  Man  merely  holds  the  balance  of  power  and 


THE  PRIMARY  FACTORS  OF  PRODUCTION        91 

uses  his  limited  physical  strength  and  his  superior  intellect  in 
giving  the  advantage  to  his  friends  in  the  subhuman  world 
and  in  placing  his  enemies  at  a  disadvantage.  In  the  field 
of  mechanics,  likewise,  by  moving  a  vast  number  of  pieces  of 
matter,  thereby  bringing  natural  forces  into  play,  he  assembles 
powerful  engines.  Then,  as  in  the  case  of  a  locomotive  engi- 
neer, by  a  very  moderate  pressure  he  moves  a  lever  which 
in  turn  sets  powerful  forces  to  work  serving  his  purpose. 
Other  engines,  equally  powerful  and  controlled  with  equal 
ease,  set  powerful  forces  to  work  destroying  his  enemies, 
both  human  and  subhuman. 

One  of  the  labors  of  Hercules,  it  will  be  remembered,  was 
to  clean  the  Augean  stables.  According  to  the  legend,  three 
thousand  oxen  had  been  stabled  there  for  thirty  years,  and 
the  stalls  had  never  been  cleaned.  Being  required  to  clean 
these  stables  in  one  day,  he  turned  the  rivers  Alpheus  and 
Peneus  through  them,  and  thus  accomplished  what  his  mon- 
strous strength  would  not  have  enabled  him  to  do  directly. 
Very  commonplace  men  accomplish  greater  engineering  feats 
than  that  nowadays. 

Writers  who  have  wished  to  impress  their  readers  with  the 
vastness  of  some  political  or  social  revolution  have  sometimes 
adopted  the  device  of  picturing  someone  as  falling,  just  before 
the  revolution,  into  a  Rip  Van  Winkle  sleep  and  awaking  just 
after  the  revolution  into  a  new  world.  His  perplexity  in  trying 
to  understand  his  new  surroundings  is  not  only  amusing  but 
usually  very  instructive.  We  need  not  adopt  the  device  of 
whisking  someone  through  an  interval  of  time  in  order  to 
impress  him  with  the  change  which  man  has  wrought  in  his 
material  surroundings.  It  is  only  necessary  to  imagine  a  philo- 
sophical savage  transported  over  a  few  hundred  miles  of  space 
and  set  down  in  a  modern  industrial  center.  Let  us  imagine 
him  on  a  busy  corner  of  some  great  city,  where  pavements, 
street-car  tracks,  curbstones,  and  sidewalks  have  replaced  the 
native  turf  ;  where,  instead  of  trees,  tall  buildings  of  steel  and 


92  PRINCIPLES  OF  POLITICAL  ECONOMY 

concrete  rise  hundreds  of  feet  into  the  air,  and  the  narrow  strip 
of  blue  between  is  obscured  by  elevated  railroads,  trolley  wires, 
poles,  and  other  obstacles;  while  the  ground  underneath  is 
honeycombed  with  cellars  and  sub-cellars,  subways  and  sub- 
subways,  and  a  network  of  sewers,  conduits,  and  other  subter- 
ranean passages.  In  trying  to  picture  to  ourselves  the  surprise 
and  perplexity  of  our  philosophical  savage,  we  may  arrive  at 
some  conception  of  the  magnitude  of  the  change  which  man 
has  wrought  in  his  natural  environment. 

Man,  nature,  and  tools.  The  two  original  factors  in  this 
work  are  man  and  nature,  —  nature  presenting  the  material  to 
be  worked  upon  and  also  certain  powerful  forces  to  aid  man  in 
his  work,  and  man  furnishing  the  knowledge,  the  ingenuity,  the 
foresight,  the  patience,  and  also  a  certain  amount  of  muscular 
or  physical  power  to  work  upon  the  material  which  nature 
furnishes.  Both  the  raw  material  and  the  natural  forces,  in 
their  elemental  state,  are  commonly  included  under  the  name 
land.  Not  only  the  soil  fertility  and  the  minerals,  but  also  the 
sunlight  and  sun  heat,  the  rain  and  the  atmosphere,  are  com- 
monly regarded  as  the  appurtenances  of  land.  The  most  im- 
portant quality  of  land  is  that  of  extension.  Whoever  controls 
a  portion  of  the  earth's  surface  owns  thereby  the  air  which  lies 
above  it,  also  a  certain  fraction  of  the  sun's  rays  and  a  certain 
portion  of  the  rainfall,  together  with  the  soil  and  the  subsoil 
immediately  below  the  surface  and  the  moisture  beneath. 
Under  some  systems -of  law  he  also  owns  the  minerals  which 
are  found  anywhere  beneath  the  surface.  In  fact,  ownership  of 
land,  under  these  systems,  extends  from  the  center  of  the  earth 
to  the  uttermost  heights  above  the  surface.  However,  we  are 
not,  at  this  point  in  our  discussion,  so  much  interested  in  what 
is  included  in  the  ownership  of  land  as  in  what  is  included 
under  land  as  a  factor  in  production.  It  may  be  said  to  include 
all  the  materials  furnished  by  nature  for  man  to  work  upon. 

While  man  and  nature  are  the  original  and  primary  factors 
in  the  problem,  a  very  little  study  will  show  anyone  that  man 


THE  PRIMARY  FACTORS  OF  PRODUCTION        93 

would  not  accomplish  very  much  if  he  relied  solely  upon  his 
own  strength  and  did  not  make  use  of  tools  to  add  to  the 
power  and  effectiveness  of  his  efforts.  He  can  strike  a  harder 
blow  with  a  stone  held  in  the  hand  than  with  the  hand  alone, 
making  use  of  the  hardness  of  the  stone  and  the  momentum 
which  goes  with  its  weight.  When  he  fits  a  handle  to  the  stone 
he  can  strike  a  still  harder  blow.  When  the  stone  is  provided 
with  a  cutting  edge,  it  becomes  still  more  effective  for  certain 
purposes.  By  making  use  of  such  simple  mechanical  devices 
as  the  lever  and  the  inclined  plane,  he  can  move  bodies  far  too 
large  for  the  meager  strength  of  his  unaided  muscles.  It  is  a 
long  road,  but  a  fairly  direct  one,  from  these  simple  begin- 
nings to  the  mighty  engines  and  complicated  machines  of  the 
present  day.  So  important  have  tools  become  in  the  economy 
of  a  modern  nation  that  they  are  generally  treated  as  a  third 
factor  of  production,  along  with  man  and  nature.  While  man 
and  nature  are  the  original  and  primary  factors,  and  tools  are 
the  derived  and  secondary  factors,  they  have  become,  in  spite  of 
that  fact,  almost  as  important  as  either  of  the  original  factors. 

Labor.  The  human  factor  is  usually  named  labor  in  eco- 
nomic discussions,  but  it  must  be  remembered  that  labor 
includes  the  work  of  the  mind  as  well  as  of  the  body.  As 
a  matter  of  fact,  labor  was  originally  used  in  a  much  narrower 
sense.  Management,  or  direction,  was  assumed  to  be  the  real 
thing,  and  discussions  of  the  problems  of  production  assumed 
the  manager's  point  of  view.  What  were  his  problems  ?  First, 
of  course,  was  the  problem  of  supplying  himself  with  the 
three  factors  of  production,  —  labor,  land,  and  capital,  or  tools. 
Since  tools  were  purchasable,  a  supply  of  purchasing  power 
was  all  that  was  necessary  in  order  to  get  tools.  Hence,  pur- 
chasing power  came  to  be  the  meaning  of  capital.  With  a 
supply  of  these  three  factors,  labor,  land,  and  capital,  he  was 
prepared  to  begin  the  work  of  organizing  a  productive  enter- 
prise. He  needed  good  labor  as  well  as  good  land  and  good 
tools.  An  adequate  supply  of  labor,  land,  and  capital  of  good 


94  PRINCIPLES  OF  POLITICAL  ECONOMY 

quality  has  generally  been  regarded,  therefore,  as  the  primary 
factors  in  national  prosperity.  But  it  is  quite  as  important, 
if  not  more  important,  that  there  be  capable  management. 
From  the  laborer's  point  of  view,  what  he  wants  is  more 
and  better  managers  to  hire  and  direct  him,  to  bid  against 
one  another  for  his  labor,  not  more  and  better  laborers  to 
compete  with  himself.  This  point  of  view  is  quite  as  impor- 
tant as  that  of  the  manager,  who  does  not  feel  the  need  of 
more  and  better  managers  to  compete  with  himself,  but  rather 
for  more  and  better  laborers  to  work  under  his  direction. 

There  are  several  reasons  why  it  might  be  better  to  con- 
tinue using  the  terms  man,  nature,  and  tools,  as  we  have  done 
thus  far  in  this  chapter,  rather  than  labor,  land,  and  capital; 
but,  on  the  whole,  it  is  probably  better  to  follow  the  custom 
of  writers  on  economics  and  use  the  latter  set  of  terms.  In 
doing  so,  however,  it  must  be  understood  that  labor  includes 
all  effort  put  forth  by  men,  whether  that  effort  be  physical 
or  mental,  or  a  combination  of  both ;  that  land  includes  every- 
thing which  nature,  outside  of  man,  provides,  even  though  it 
be  above  or  below  the  surface  of  the  earth  ;  and  that  capital 
includes  all  joint  products  of  man  and  nature  which  are  used, 
not  for  direct  consumption  by  their  owners,  but  for  the  pur- 
pose of  aiding  them  in  getting  other  goods  which  they  can 
consume  or  enjoy. 

Other  helps  to  "national  prosperity.  National  prosperity  de- 
pends, to  be  sure,  upon  many  other  things,  such  as  organiza- 
tion, a  good  system  of  laws  which  encourage  rather  than 
discourage  production,  a  body  of  sound  and  wholesome  tradi- 
tion, and  a  system  of  morals  under  which  all  vigorous  and  con- 
structive habits  are  called  virtues,  and  are  therefore  approved 
and  encouraged,  and  all  soft  and  enervating  habits  of  self- 
indulgence  are  called  vices,  and  are  therefore  disapproved  and 
discouraged.  It  is  also  important  that  there  be  a  vigorous 
religion  which  shall  lend  an  emotional  support  to  this  vig- 
orous type  of  morality,  —  which  shall,  in  short,  create  an 


THE  PRIMARY  FACTORS  OF  PRODUCTION        95 

emotional  interest  in  an  austere  and  productive  life.  However, 
these  three  factors,  —  labor,  land,  and  capital,  —  as  we  have 
defined  them,  are  the  elementary  factors.  They  are  the  raw 
materials  out  of  which  national  prosperity  is  built. 

Since  labor  means  the  human  factor  in  production,  it  really 
includes  not  merely  the  wageworkers  but  all  kinds  and  classes 
of  human  beings  who  have  any  part  in  production.  It  is,  of 
course,  just  as  important  that  there  be  strong,  capable,  and 
well-trained  men  as  that  there  be  productive  and  well-tilled 
land  and  good  tools,  machinery,  and  other  equipment.  It  is 
not  enough  that  the  people  be  merely  capable  in  a  general 
way ;  it  is  necessary  also  that  they  be  trained  in  many  special- 
ized forms  of  skill.  These  specialized  forms  of  skill  must, 
naturally,  be  the  kinds  that  are  especially  needed.  One  might 
develop  remarkable  skill  in  the  performance  of  a  certain  feat ; 
but  if  no  one  needs  to  have  it  performed,  it  is  of  no  advantage 
either  to  the  doer  or  to  the  community.  This  means  that  it  is 
necessary  to  increase  the  quantity  of  those  special  forms  of 
ability  which  seem  to  be  in  demand,  —  that  there  be  more 
men  who  can  do  certain  important  things  which  relatively 
few  are  now  capable  of  doing.  In  our  complex  civilization 
it  is  not  likely  that  one  individual  or  one  kind  of  skill  can  pro- 
duce the  whole  of  any  article.  It  usually  takes  several  men, 
each  one  doing  a  special  kind  of  work  requiring  a  special  kind 
of  skill,  to  produce  anything.  If  one  special  kind  of  skill  is 
lacking,  the  other  workers  may  be  helpless.  Not  many  years 
ago  a  glass  manufacturer  was  planning  a  new  branch  of  his 
business,  in  which  a  new  product  was  to  be  produced  and 
several  hundred  men  were  to  be  employed.  Brick  and  mortar 
and  all  building  materials,  as  well  as  tools  and  machines,  could 
easily  be  procured.  All  the  labor  necessary  for  the  running 
of  the  plant  was  available,  except  one  special  and  highly  scien- 
tific expert.  He  could  not  be  found  in  the  country.  As  a 
consequence,  the  new  branch  of  the  business  could  not  be 
started,  the  new  product  was  not  produced,  and  employment 


96  PRINCIPLES  OF  POLITICAL  ECONOMY 

was  not  given  to  several  hundred  men.  It  was  obviously  very 
important  for  that  community  and  for  those  laborers  that  they 
should  have  a  larger  supply  of  that  special  scientific  and  tech- 
nical ability.  One  man  trained  for  that  kind  of  work  might 
easily  have  been  worth  as  much  to  the  country  as  a  hundred 
men  trained  for  a  kind  of  work  for  which  there  were  thousands 
of  others  already  trained. 

A  highly  efficient  system  of  education  should  have  antici- 
pated the  need  for  these  experts  and  should  have  trained  them. 
Given  a  race  of  high  average  natural  ability,  the  problem  of 
supplying  these  highly  specialized  experts  is  mainly  a  matter 
of  education.  The  probability  that  among  a  hundred  millions  of 
people  of  high  ability  a  few  could  be  found  with  the  capacity 
for  the  special  training  needed  is  so  great  as  to  amount  to 
a  certainty ;  but  it  is  the  task  of  the  educational  system  to 
discover  these  persons  and  then  to  give  them  the  necessary 
training.  The  nation  with  such  an  educational  system  as  this, 
together  with  a  population  of  high  natural  ability,  is  not  likely 
to  be  beaten  in  economic  competition.  By  far  the  most  valu- 
able resource  of  a  nation  is  its  fund  of  human  energy,  which 
means  its  people.  If  this  resource  is  rich  to  begin  with,  and  if 
it  is  thoroughly  developed  by  a  sound  and  efficient  educational 
system,  the  nation  has  the  first  and  most  important  essential  of 
greatness.  Nations  have  grown  rich  and  powerful  in  the  midst 
of  rather  poor  natural  conditions,  by  reason  of  the  fact  that  they 
have  developed  their  human  resources.  Other  nations  have 
grown  poor  and  weak  in  the  midst  of  rich  natural  surroundings 
by  reason  of  the  fact  that  they  have  wasted  or  failed  to  develop 
the  productive  capabilities  of  their  people. 

Land.  Rich  natural  resources  are,  however,  very  important ; 
that]  is  to  say,  a  nation  which  develops  its  human  resources 
properly  can  prosper  more  if  it  possesses  a  rich  territory  than 
if  it  possesses  a  poor  territory.  That  is  so  obvious  as  to  need 
very  little  discussion.  It  is  very  much  like  saying  that  though 
a  good  farmer  may  manage  to  prosper  on  rather  poor  land, 


THE  PRIMARY  FACTORS  OF  PRODUCTION        97 

nevertheless  he  would  prosper  more  on  good  land.  This 
brings  us  to  the  consideration  of  the  other  original  and  pri- 
mary factor  of  production,  namely,  land.  The  productive  power 
of  land  is  not  simply  a  matter  of  acres,  any  more  than  the 
productive  power  of  labor  is  a  matter  of  numbers.  Quality  is 
as  important  as  area,  though  area  is  very  important.  Area  is 
important  in  agriculture  because  it  takes  area  to  catch  the 
sun's  rays  and  the  rainfall,  \vithout  which  plants  cannot  grow. 
It  also  requires  area  to  give  standing  room  to  plants.  But 
with  all  these  advantages  which  go  with  area,  if  there  be 
no  soil  or  plant  food  in  the  soil,  there  can  be  no  production. 

The  productive  power  of  the  soil  itself  depends  partly  upon 
its  physical  and  partly  upon  its  chemical  condition.  A  good 
physical  condition  depends  upon  freedom  from  stones  and 
other  obstructions  which  interfere  with  tillage  and  the  use  of 
machines,  a  good  subsoil  which  permits  excess  water  to  per- 
colate downward  in  time  of  heavy  rainfall  and  then  to  rise  to 
the  surface  in  times  of  drought,  sufficient  porosity  to  permit  the 
roots  of  plants  to  penetrate  easily,  sufficient  firmness  to  lend 
support  to  the  plants,  and  so  on.  A  good  chemical  condition 
depends,  first,  upon  the  absence  of  injurious  acids  and  alkalis 
in  dangerous  quantities,  and,  second,  upon  the  presence  of  the 
elements  of  plant  food  in  sufficient  quantities  and  in  proper 
proportions.  Plants,  like  animals  and  human  beings,  need  a 
balanced  ration  and  cannot  thrive  without  it.  There  are  many 
of  these  food  elements,  but  those  which  are  most  likely  to  be 
absent  or  insufficient  are  nitrogen,  phosphorus,  and  potassium. 
Generally  speaking,  any  soil  which  possesses  these  three  ele- 
ments in  the  proper  proportion  may  be  said  to  be  good  soil, 
so  far  as  plant  food  is  concerned.  The  other  necessary  ele- 
ments are  so  universally  abundant  as  to  furnish  the  farmer 
no  occasion  for  worry  or  even  forethought.  Only  the  limiting 
factors  of  production  are  considered  to  be  of  any  economic 
importance.  Hence  only  those  which  are  likely  to  be  scarce 
and  to  limit  production  are  called  economic  factors. 


98  PRINCIPLES  OF  POLITICAL  ECONOMY 

Mineral  lands.  Mineral  lands  differ  so  fundamentally  from 
farm  lands  as  to  be  almost  in  a  class  by  themselves.  While 
farm  land  is  so  widely  distributed  as  to  give  almost  every  sec- 
tion of  the  earth's  surface  some  opportunity  for  a  profitable 
agriculture,  and  while  no  section  can  become  fabulously  rich 
in  farm  products,  minerals  are  so  localized  as  to  leave  large 
areas  of  habitable  territory  with  practically  no  mineral  resources 
whatever,  while  very  small  districts  are  sometimes  so  rich  as 
scarcely  to  furnish  building  space  for  the  dwellings  of  the  peo- 
ple who  live  by  working  the  mines.  Coal  and  iron  are  not 
only  the  most  valuable,  in  the  aggregate,  of  all  the  minerals, 
but  they  together  have  done  more  to  give  the  peculiar  character 
to  our  present  industrial  civilization  than  any  other  two  factors. 
This  is  sometimes  called  the  Age  of  Steel,  but  without  coal  to 
furnish  a  cheap  and  abundant  fuel,  and  without  the  rich  beds 
of  iron  ore,  some  of  which  can  be  worked  with  a  steam  shovel, 
steel  could  not  have  become  so  abundant  and  such  a  dominant 
factor  in  this  industrial  age. 

Capital.  Capital  takes  on  such  a  multiplicity  of  forms  as 
to  make  it  impossible  to  describe  it  beyond  saying  that  it  is 
made  up  of  all  goods,  except  land,  which  are  used  to  get  an 
income.  They  are  distinguished  from  things  which  are  used 
directly  for  personal  gratification.  Thus,  all  tools  and  machinery, 
stores,  factories,  shops,  barns,  fences,  and  raw  materials  not 
yet  worked  up  into  consumable  form  are  capital.  Dwelling 
houses  occupied  by  their  owners,  food  in  the  larders  of  con- 
sumers, the  clothes  which  are  in  the  closets  as  well  as  those 
actually  being  worn,  books,  pictures,  household  furniture,  etc., 
are  consumers'  goods.  The  dividing  line  between  producers' 
goods  and  consumers'  goods  is  sometimes  a  rather  dim  and 
wavering  one,  but  that  need  not  disturb  us  much.  The  same 
may  be  said  regarding  the  line  which  separates  the  animal 
from  the  vegetable  kingdom,  and  yet  we  are  never  puzzled 
as  to  which  of  the  two  kingdoms  may  claim  any  one  of  our 
common  plants  or  animals.  The  physician's  automobile  may 


THE  PRIMARY  FACTORS  OF  PRODUCTION        99 

be  at  one  time  a  tool  of  his  profession,  and  therefore  capital, 
and  at  another  time  a  pleasure  vehicle,  and  therefore  a  con- 
sumers' good.  Many  other  objects  may  be  so  close  to  the  divid- 
ing line  as  to  puzzle  us  at  times,  but  the  great  mass  of  the 
objects  with  which  we  are  concerned  are  easily  classified. 

Capital,  like  consumers'  goods,  comes  into  existence  through 
the  application  of  labor,  ingenuity,  and  forethought  to  natural 
objects.  But  there  is  one  thing  which  enters  into  the  pro- 
duction of  a  piece  of  capital  which  does  not  enter  to  the  same 
degree  into  the  production  of  a  consumers'  good,  —  that  is, 
waiting,  or  abstinence.  If  you  labor  to  make  a  tool  for  your 
own  use,  you  do  not  reap  the  reward  of  your  labor  until  the 
tool  has  been  completed  and  has  been  used  for  a  time  in 
adding  to  your  production.  You  have  postponed  your  con- 
sumption. If  you  sell  the  tool  to  someone  else,  you  may  at 
once  spend  the  money  you  receive  for  it  and  avoid  waiting. 
But  the  one  who  bought  it  of  you  now  has  to  wait,  since  he 
has  given  up  the  opportunity  to  spend  the  money  for  con- 
sumers' goods  and  must  now  abstain  until  the  tool  begins 
to  bring  him  in  an  income. 

When  production  exceeds  consumption,  capital  is  increased. 
From  the  foregoing  it  will  appear  that  the  accumulation  of 
capital  depends  in  a  very  direct  manner  upon  the  character 
of  the  people.  Unless  the  nation  consumes  less  than  it  pro- 
duces, it  is  impossible  that  capital  should  increase  at  all.  Even 
if  accumulation  should  take  the  form  of  saving  money,  it  would 
still  be  necessary  for  all  the  people  to  live  on  the  consumers' 
goods  produced  by  a  part  of  them  in  order  that  the  rest  of 
them  might  devote  their  time  to  the  making  of  tools  and  other 
producers'  goods.  That  would  be  necessary  even  in  a  commu- 
nistic society.  In  our  present  economic  system  any  individual 
who  can  live  on  less  than  his  income  may  spend  the  balance 
of  it  on  tools  and  other  producers'  goods.  That  which  he 
spends  for  consumers'  goods  virtually  hires  men  to  produce 
that  class  of  goods,  while  that  which  he  spends  for  producers,' 


100          PRINCIPLES  OF  POLITICAL  ECONOMY 

goods  virtually  hires  men  to  produce  that  class  of  goods.  The 
more  money  there  is  spent  for  producers'  goods,  the  more 
rapidly  they  will  accumulate.  This  means  that  the  more  thrifty 
the  people  are,  and  the  more  inclined  they  are  to  live  on  less 
than  their  incomes  and  to  spend  the  balance  for  tools,  the 
better  equipped  with  tools  they  will  be. 

We  now  see  how  definitely  the  prosperity,  power,  and  great- 
ness of  a  nation  depend  upon  the  three  factors,  labor,  land, 
and  capital.  A  nation  whose  people  are  possessed  of  high 
average  natural  ability,  whose  educational  system  trains  that 
ability  (especially  for  those  fields  of  work  where  ability  is  most 
needed),  which  has  an  abundance  of  rich  land,  and  which  accu- 
mulates capital  rapidly,  so  as  to  supply  itself  with  the  best  of 
tools  and  other  equipment,  has  all  that  is  needed  on  the  physical 
side  to  make  it  prosperous.  But  much  remains  to  be  said  in 
detail  about  each  of  these  factors  and  the  ways  in  which  they 
are  to  be  combined. 


CHAPTER  IX 

THE  QUALITY  OF  THE  PEOPLE 

Why  man  rules  over  the  rest  of  the  animal  creation.  In 
attempting  to  discuss  the  quality  of  the  people,  we  are  not 
necessarily  entering  upon  a  discussion  of  the  whole  field  of 
physiology,  psychology,  and  morals.  There  are  certain  out- 
standing qualities  which  man  possesses  in  greater  degree  than 
the  brutes,  which  civilized  man  possesses  in  greater  degree 
than  the  savage,  and  which,  in  any  civilized  community,  the 
more  successful  classes  possess  in  greater  degree  than  the 
less  successful.  There  are  other  qualities,  such  as  muscular 
strength,  which  the  brutes,  many  of  them  at  least,  possess  in 
greater  degree  than  man.  If  these  were  the  important  qualities, 
man  could  scarcely  claim  superiority  over  the  brutes.  There 
are  other  qualities,  such  as  the  sense  of  smell  and  the  ability 
to  endure  pain,  which  certain  savages  seem  to  possess  in  greater 
degree  than  civilized  man.  If  these  were  the  important  quali- 
ties, civilized  man  could  scarcely  claim  superiority  over  the 
savage.  Some  savage  races  seem  even  to  possess  certain  moral 
qualities  in  greater  degree  than  civilized  men.  Travelers  have 
frequently  praised  the  honesty  of  certain  tribes,  their  fidelity 
to  their  friends,  their  courage,  and  their  fortitude.  Civilized 
nations  are  each  possessed  of  certain  characteristic  vices  which 
can  scarcely  be  apologized  for,  much  less  defended.  One  who 
thinks  that  the  peculiar  virtues  of  the  savage  and  the  peculiar 
vices  of  the  civilized  man  are  the  important  virtues  and  vices 
will  certainly  reach  the  conclusion  that  the  savage  is  really 
superior  morally  to  the  civilized  man.  But  it  is  very  easy  to 
be  mistaken  in  one's  emphasis.  We  need  to  consider  carefully 
what  qualities  really  give  superiority  to  a  people. 


S1TY  OF  CALIFORNIA 


102          PRINCIPLES  OF  POLITICAL  ECONOMY 

Our  present  problem  is  to  form  some  sort  of  intelligent 
opinion  as  to  the  qualities  which  a  people  need  in  order  to 
become  prosperous,  powerful,  and  great  in  an  economic  and 
worldly  sense.  The  following  outline  is  suggested  as  express- 
ing a  tentative  opinion  on  this  subject.  Whatever  may  be 
said  on  purely  religious  or  moral  grounds,  a  nation  whose 
people  are  possessed  of  these  qualities  in  superior  degree  will 
have  an  economic  advantage,  other  things  equal,  over  a  nation 
whose  people  possess  them  in  less  degree. 

THE  CHARACTERISTICS  OF  A  CAPABLE  RACE 

1.  Knowledge  of 

a.  The  physical  environment 

b.  The  social  environment 

2.  Forethought,  as  shown  by 

a.  Industry 

b.  Thrift 

3.  Dependableness,  made  up  of 

a.  Honesty 

b.  Sobriety 

c.  Courage 

d.  Fidelity 

4.  Reasonableness,  as  shown  by 

a.  Eagerness  to  learn 

b.  Obedience  to  law 

c.  Willingness  to  cooperate 

Man  has  achieved  "  dominion  over  the  fish  of  the  sea,  and 
over  the  fowl  of  the  air,  and  over  the  cattle,  and  over  all  the 
earth,  and  over  every  creeping  thing  that  creepeth  upon  the 
earth  "  by  reason  of  certain  powers  or  qualities  which  he  pos- 
sesses in  higher  degree  than  they.  These  are,  first,  his  greater 
knowledge  of  and  control  over  the  forces  of  nature ;  second, 
his  greater  forethought  in  making  provision  for  the  future  and 
working  for  distinct  ends ;  third,  his  greater  power  of  organi- 
zation, or  teamwork.  This  power  of  organization  is  the  result 
mainly  of  two  factors,  his  dependability  and  his  reasonableness. 
The  same  powers,  or  qualities,  have  given  the  civilized  man 


THE  QUALITY  OF  THE  PEOPLE  103 

dominion  over  the  savage,  and  the  intellectual  man  dominion 
over  the  ignorant  man.  In  the  future,  as  in  the  past,  we  must 
expect  that  the  world  will  be  ruled  by  the  nations  which  possess 
these  qualities  in  the  highest  degree. 

Physical  advantages  over  the  brutes.  Man's  erect  posture, 
leaving  his  hands  free  to  be  used  for  other  purposes  than 
for  locomotion,  must  be  counted  as  a  great  advantage  over 
the  brute  creation.  A  thumb  which  opposes  the  fingers  and 
gives  him  a  better  grasp  adds  greatly  to  this  advantage.  These 
advantages,  however,  would  not  count  for  much  if  he  did  not 
have  a  mind  which  enabled  him  to  devise  tools  to  be  grasped 
and  used  with  his  thumbed  hands.  So  far  as  the  upright  pos- 
ture and  the  thumb  are  concerned,  while  they  give  him  an 
advantage  over  the  brutes,  they  alone  do  not  give  the  civilized 
man  any  advantage  over  the  savage.  The  posture  of  the 
savage  is  as  upright,  and  his  thumb  as  handy,  as  the  civilized 
man's.  In  seeking,  therefore,  the  advantages  which  have  given 
the  civilized  man  dominion  over  the  savage  we  must  look  at 
the  mental  and  moral  qualities.  These  are  not  necessarily 
physiological  in  their  nature ;  they  may  be  mainly  the  results 
of  accumulated  history,  tradition,  and  training. 

Intellectual  advantages  of  civilized  men  over  savages. 
Knowledge  of  the  forces  of  nature  may  almost  be  said  to 
include  control  over  them,  though  the  erect  posture  and  the 
thumb  assist  in  that  control.  Our  physical  environment  includes 
not  only  the  physical  objects  which  surround  us  but  their 
properties  and  the  forces  which  govern  them  as  well.  To 
know  our  physical  environment,  therefore,  means  to  know 
the  properties  of  matter  and  the  forces  which  operate  in  and 
through  it.  In  short,  this  is  scientific  knowledge.  It  is  this 
which  underlies  all  our  mechanical  improvements.  Our  social 
environment  includes  human  beings  and  all  their  powers, 
characteristics,  habits,  emotions,  etc.  A  knowledge  of  one's 
social  environment  includes  such  a  knowledge  of  man  and  his 
ways  as  to  enable  one  to  work  with  other  men  comfortably, 


104          PRINCIPLES  OF  POLITICAL  ECONOMY 

knowing  what  to  expect  and  what  to  depend  upon.  This  is 
particularly  important  in  those  who  are  intrusted  with  the  work 
of  governing  or  administering  the  affairs  of  government. 

Forethought.  Forethought  is  only  one  aspect  of  what  may 
be  called  the  time  sense.  Among  the  many  definitions  of  man 
is  one  which  says  that  he  is  the  being  "  who  looks  before  and 
after."  His  memory  of  the  distant  past  and  his  forethought 
for  the  distant  future  modify  his  actions  in  the  immediate 
present  more  than  the  actions  of  any  other  creature  are  modi- 
fied. But  the  past  cannot  be  changed  ;  only  the  future  now 
lies  within  our  control.  Even  industry  is  chiefly  carried  on 
because  of  the  vivid  appreciation  in  the  present  of  those  needs 
which  are  certain  to  arise  in  the  future.  Those  creatures 
which  appreciate  future  needs  most  vividly  will,  of  course, 
labor  most  assiduously.  The  same  difference  shows  itself 
among  men.  Those  nations,  as  well  as  those  individuals,  who 
see  most  clearly  in  advance  what  their  future  needs  are  likely 
to  be  are  the  nations  and  the  individuals  who  show  the  greatest 
industry  as  well  as  the  greatest  thrift. 

There  is  a  story  of  an  aged  savage  who,  after  having  lived 
in  civilized  communities  most  of  his  life,  returned  in  his  old 
age  to  his  native  tribe,  saying  that  he  had  tried  civilization  for 
forty  years  and  that  it  was  n't  worth  the  trouble.  Much  of  the 
philosophy  of  civilization  is  summed  up  in  that  remark.  Civ- 
ilization consists  largely  in  taking  trouble.  Genius,  in  the  indi- 
vidual, has  been  said  to  consist  in  the  capacity  for  taking 
infinite  pains  in  one's  work.  It  is  this  capacity  which  marks 
the  superior  race  as  well  as  the  superior  individual.  They 
who  find  the  taking  of  pains  too  burdensome  to  be  borne 
will  naturally  decide  that  civilization  is  not  worth  the  trouble. 
They  who  do  not  find  it  so  very  burdensome  to  take  pains 
will  naturally  decide  that  civilization  is  worth  the  trouble,  and 
will  therefore  become  civilized. 

This  principle  applies  to  every  stage  of  civilization  and 
progress.  The  greatest  advancement  is  made  by  those  who 


THE  QUALITY  OF  THE  PEOPLE  10$ 

are  capable  of  taking  the  greatest  pains.  It  applies  especially 
to  agricultural  progress.  It  is  more  trouble  to  select  than  not 
to  select  seed,  and  to  select  it  in  the  field  than  in  the  bin.  It 
is  more  trouble  to  test  cows  than  not  to  test  them,  to  keep 
accounts  than  not  to  keep  them,  to  diversify  or  rotate  crops 
than  not  to  diversify  or  rotate,  to  mix  fertilizers  intelligently 
than  to  buy  them  already  mixed,  to  cooperate  with  one's  pig- 
headed neighbors,  especially  if  one  is  one's  self  a  little  pig- 
headed, than  to  work  alone.  It  is  also  more  profitable.  In  all 
these  and  in  a  multitude  of  other  cases  it  is  found  that  it  pays 
to  take  trouble. 

Thrift.  Thrift  differs  from  industry  in  that  it  consists  in 
saving  that  which  is  already  produced  or  possessed,  whereas 
industry  consists  in  producing  or  gaining  possession  of  desir- 
able objects.  Even  more  than  industry,  thrift  is  a  mark  of 
forethought.  It  requires  an  even  stronger  self-control,  combined 
with  a  keener  sense  of  the  importance  of  future  needs,  to  lead 
one  to  refrain  from  consuming  that  which  is  already  produced 
than  it  does  to  work  to  produce  that  which  does  not  yet  exist. 
However,  the  two  things  must  always  go  together,  in  the  com- 
munity at  least  if  not  in  the  individual.  The  farmer,  that  is, 
some  farmer,  must  at  least  save  seed  (which  means  that  he 
must  refrain  from  consuming  it)  before  any  farmer  can  labor 
successfully  at  the  growing  of  next  year's  crop.  One  may, 
however,  save  the  seed  which  another  plants.  There  are  some 
savages  so  thriftless  as  not  to  be '  able  even  to  save  seed. 
Needless  to  say,  their  industry,  even  if  they  were  industrious, 
would  not  count  for  much.  If  cattle  are  benevolently  given  to 
them,  they  kill  them  all  in  time  of  scarcity.  Therefore  they 
cannot  succeed  even  as  herdsmen  but  fall  back  into  a  lower 
economic  stage,  namely,  hunting  and  fishing.  Such  people  are 
not  likely  to  grow  powerful  enough  to  occasion  much  uneasiness 
to  the  rest  of  the  world.  Even  if  there  were  no  other  reasons 
for  their  weakness,  they  could  never  support  numbers  enough 
to  be  very  strong. 


106          PRINCIPLES  OF  POLITICAL  ECONOMY 

Knowledge  and  forethought  are  primarily  mental  qualities, 
though  there  is  an  element  of  morality  in  forethought ;  depend- 
ableness  and  reasonableness  are  primarily  moral  qualities, 
though  there  is  an  element  of  mentality  in  both  of  them. 
In  this  age  of  great  mental  achievements,  especially  in  the 
fields  of  physical  science  and  mechanical  invention,  there  is  a 
tendency  to  underestimate  the  importance  of  moral  qualities. 
This  tendency  may  have  been  increased  by  the  perception 
that  moral  teachers  themselves  have  sometimes  overemphasized 
the  lesser  virtues  (that  is,  those  which  count  least  in  the 
improvement  of  social  life)  and  underemphasized  those  which 
count  most. 

Moral  advantages  of  civilized  men  over  savages,  —  depend- 
ableness.  Nothing  can  be  more  important  in  the  building  of 
a  great  and  prosperous  nation  than  dependableness.  Many 
writers  have  taken  pains  to  point  out  how  dependent  we  are 
upon  one  another  in  a  highly  civilized  state.  One  way  of 
illustrating  this  mutual  dependence  is  by  comparing  a  highly 
developed  society  to  a  complicated  machine  or  a  highly  devel- 
oped animal  organism.  There  are  many  striking  resemblances, 
among  the  most  important  of  which  is  the  interdependence  of 
parts.  This  interdependence  of  parts  increases  as  we  ascend 
in  the  scale  of  organic  life.  In  the  human  body,  for  example, 
or  in  that  of  any  of  the  higher  mammals,  the  interdependence 
of  parts  is  much  greater  than  that  found  in  the  bodies  of  the 
lower  forms  of  life.  The  same  change  is  noticeable  as  we 
ascend  in  the  scale  of  social  life.  Each  individual  tends  to 
specialize  in  some  particular  kind  of  work  and  to  depend  upon 
other  individuals,  who  have  specialized  on  other  kinds  of  work, 
to  supply  him  with  goods  and  services  which  he  cannot  produce 
for  himself.  Some  of  the  reasons  why  this  is  so  advantageous 
will  be  discussed  in  the  chapter  The  Division  of  Labor. 

There  can  be  no  great  amount  of  dependence  of  one  upon 
another  where  the  people  are  not  dependable.  This  is  equally 
true  of  a  machine  or  an  animal  organism,  but  we  do  not 


THE  QUALITY  OF  THE  PEOPLE  107 

attribute  moral  qualities  to  the  parts  of  any  of  them.  The 
wheel  in  a  machine  has  no  choice.  It  must  of  physical  neces- 
sity do  whatever  its  construction  requires  it  to  do.  But  if  the 
machine  be  not  well  made,  so  that  some  part  is  not  compelled 
to  work  harmoniously  with  every  other  part,  the  whole  machine 
will  work  very  imperfectly  or  not  at  all.  Similarly,  if  one 
part  of  the  animal  organism,  especially  of  a  highly  developed 
organism,  should  fail  to  perform  its  functions,  every  other 
part  is  likely  to  suffer,  and  the  whole  organism  may  even  die. 
There  is  no  physical  necessity  compelling  a  person  to  be  de- 
pendable, as  is  the  case  with  the  parts  of  a  well-made  machine 
or  the  organs  of  a  healthy  body ;  but  it  is  just  as  important 
that  he  should  be.  That  is  why  dependableness  is  such  an 
important  quality  of  the  people,  and  why  it  becomes  increas- 
ingly important  as  civilization  advances.  In  fact,  without  it 
civilization  cannot  advance  at  all. 

Our  mutual  dependence  is  of  various  sorts  and  degrees.  If 
someone  fails  to  do  that  which  he  is  expected  to  do,  he  may 
imperil  the  lives  of  hundreds  or  thousands  of  his  fellow  men, 
as  in  the  case  of  a  switch  tender  or  a  locomotive  engineer ; 
he  may  occasion  the  loss  of  valuable  property ;  or  he  may,  as 
in  the  case  of  an  unpunctual  person,  merely  upset  our  calcula- 
tions and  cause  many  of  us  to  waste  our  time  waiting  for  him 
or  guessing  what  he  is  likely  to  do.  In  all  these  cases,  in 
greater  or  less  degree,  he  occasions  loss  to  the  nation.  The 
time  we  waste  on  account  of  his  lack  of  dependableness  is  as 
truly  a  loss  as  the  property  which  is  destroyed.  Aside  from 
the  direct  loss  of  time  and  property,  there  is  the  greater  loss 
which  comes  from  the  discouragement  of  enterprise,  the  lack 
of  confidence,  and  the  general  demoralization  which  ensues 
when  men  can  no  longer  rely  upon  one  another. 

Honesty.  The  first  element  in  dependableness  is  common 
honesty.  Men  who  will  not  keep  their  word,  fulfill  their  con- 
tracts, or  do  business  without  cheating,  are  not  only  morally 
odious  ;  they  are  also  obstructions  to  the  progress  and  prosperity 


1 08          PRINCIPLES  OF  POLITICAL  ECONOMY 

of  the  community.  Perhaps  this  is  why  they  are  morally 
odious.  A  community  made  up  of  such  people,  no  matter  how 
gifted  they  might  be  mentally,  could  scarcely  prosper.  No  one 
could  trust  anyone  else ;  consequently  there  could  be  no  credit. 
Nothing  could  be  bought  or  sold  without  the  closest  and  most 
minute  inspection,  and  this  would  be  laborious  and  therefore 
wasteful  of  time.  There  could  be  no  cooperation  or  teamwork, 
but  everyone  would  have  to  look  after  himself  and  spend  a 
great  deal  of  time  watching  his  dishonest  neighbors.  Among 
the  many  advantages  of  honesty,  therefore,  not  the  least  is 
that  it  is  a  great  labor-saving  device  when  it  is  practiced 
throughout  a  community.  Of  two  communities  which  are 
otherwise  equal,  the  one  within  which  honesty  prevails  will 
advance  more  rapidly  in  prosperity  and  power  than  the  one  in 
which  dishonesty  prevails. 

Sobriety.  Next  to  honesty,  sobriety  is  probably  the  most 
important  element  in  dependableness.  In  a  rudimentary  state 
of  society,  where  each  individual  works  and  acts  most  of  the 
time  alone,  and  where,  therefore,  there  is  little  interdependence, 
drunkenness  may  not  be  so  vicious  as  it  has  now  become.  In 
our  interlocking  civilization  no  personal  habit  or  vice  so  unfits 
a  man  for  usefulness  as  drunkenness.  If  you  had  to  take 
your  choice  between  riding  behind  a  locomotive  engineer  who 
was  addicted  to  drunkenness  and  riding  behind  one  who  was 
addicted  to  any  other  vice,  there  is  not  much  doubt  as  to 
which  you  would  choose.  If  you  had  to  take  your  choice 
between  a  chauffeur  who  was  in  the  habit  of  getting  drunk  and 
one  who  had  formed  any  other  bad  habit  whatsoever,  you 
would  not  be  likely  to  take  the  drunkard.  Apply  a  similar 
test  to  anyone  in  any  of  the  hundreds  of  responsible  positions 
(and  all  positions  are  coming  to  be  responsible  positions)  and 
you  will  reach  the  conclusion  that  the  person  who  is  ad- 
dicted to  drink  is  about  the  least  desirable  citizen  you  can 
name.  There  are  fewer  places  where  he  is  of  any  use  and 
more  where  he  is  a  menace  than  is  the  case  with  the  victims 


THE  QUALITY  OF  THE  PEOPLE  109 

of  any  other  vice.  Whatever  you  may  think  when  you  are 
discussing,  in  the  abstract,  the  relative  harmfulness  of  various 
vices,  you  are  not  likely  to  be  much  in  doubt  when  you  come 
to  a  concrete  case  like  that  of  a  locomotive  engineer,  a  switch- 
man, a  driver  of  an  automobile,  or  even  a  janitor  or  anyone 
else  whose  lack  of  dependableness  might  endanger  your  life. 
Sobriety  must  obviously  rank  high  among  the  virtues  which 
go  to  make  up  what  we  have  called  dependableness. 

Courage.  Courage  is  the  father  of  many  virtues,  as  fear  is 
of  many  vices.  It  is  probable  that  as  many  falsehoods  result 
from  fear  as  from  malice.  In  any  kind  of  emergency  you 
will  want  dependable  companions  who  will  not  fail  you.  Their 
dependableness  will  be  in  proportion  to  their  courage.  Even 
your  own  courage  may  depend  partly  upon  their  courage,  and 
theirs  upon  yours ;  that  is  to  say,  when  you  feel  that  you  can 
rely  upon  one  another,  you  will  all  feel  more  courageous  and 
more  capable  of  coping  with  a  difficult  situation  than  if  each 
of  you  doubts  the  courage  of  the  others.  This  applies  not 
only  to  physical  courage  in  a  time  of  physical  danger,  but  to 
moral  courage  in  times  when  the  larger  interests  of  society 
are  at  stake.  Men  of  weak  courage  fear  to  come  out  on  the 
right  side,  and  even  men  of  real  courage  have  their  confidence 
shaken  by  the  feeling  that  they  cannot  depend  upon  their 
fellow  citizens. 

Fidelity.  Fidelity  is  closely  related  both  to  honesty  and  to 
courage,  and  serves  much  the  same  purpose.  It  is  the  quality 
which  keeps  faith  even  though  one  might  gain  some  individual 
advantage  by  breaking  faith.  The  habit  of  breaking  faith  or 
abusing  confidence  demoralizes  a  group  or  a  community  and 
makes  any  kind  of  effective  teamwork  impossible. 

There  are  doubtless  many  other  elements  which  contribute 
to  the  dependableness  of  a  people,  but  these  four  are  the 
principal  ones.  Any  group  of  people  who  possess  these 
four  in  high  degree  can  rely  upon  and  cooperate  with  one 
another  and  carry  out  any  form  of  teamwork  which  they  have 


HO          PRINCIPLES  OF  POLITICAL  ECONOMY 

the  intelligence  to  plan.  A  community  whose  people  are  weak 
in  any  one  of  these  four  qualities  will  have  difficulty  in  carry- 
ing out  any  effective  scheme  of  group  action,  no  matter  how 
clearly  they  perceive  the  advantage  of  doing  so.  While  these 
are  moral  qualities,  they  are  nevertheless  qualities  upon  which 
the  economic  prosperity  of  the  nation  depends.  •  They  are 
therefore  of  just  as  much  interest  to  the  economist  as  good 
tools,  good  land,  or  any  other  factor. 

Reasonableness.  Reasonableness  is  a  noticeable  characteristic 
of  progressive  people,  as  its  absence  is  of  unprogressive  people. 
It  includes  freedom  from  prejudice,  passion,  and  superstition, 
willingness  to  take  a  sensible  view  of  things  and  to  be  guided 
by  sound  judgment  rather  than  by  stubbornness  and  general 
contrariness.  It  is  opposed  equally  to  the  slavish  following  of 
old  customs,  on  the  one  hand,  and  blind  and  headlong  pursuit 
of  new  fads,  on  the  other.  It  involves  a  frank  recognition  of 
all  the  necessary  conditions  of  social  life  and  teamwork,  and 
a  willingness  to  submit  to  those  conditions  even  at  some 
inconvenience  to  self.  It  involves  the  willingness  to  help  in 
any  genuine  reform  movement  even  at  some  inconvenience 
to  self,  and  likewise  a  recognition  of  the  necessary  and  legally 
constituted  methods  of  effective  reform. 

Teachableness.  The  first  element  in  reasonableness  is 
teachableness,  or  eagerness  to  learn,  especially  to  learn  better 
ways  of  doing  the  work  which  we  have  to  do.  Travelers 
among  backward  races  give  many  strange  accounts,  not  simply 
of  the  ineffective  methods  of  work,  which  we  might  expect, 
but  of  the  unwillingness  of  the  people  to  learn  new  ways  even 
when  they  are  shown.  One  railroad  builder  who  was  forced 
to  employ  native  labor  in  a  backward  country,  which  need  not 
be  named,  found  that  they  were  accustomed  to  carry  all  burdens 
on  their  heads.  In  moving  dirt  they  insisted  even  on  carrying 
it  in  boxes  and  various  receptacles  on  their  heads.  He  supplied 
them  with  wheelbarrows  and  gave  orders  that  they  were  to 
use  these  and  nothing  else.  They  used  the  wheelbarrows,  but 


THE  QUALITY  OF  THE  PEOPLE  in 

carried  them  also  on  their  heads,  and  nothing  could  induce 
them  to  change  their  immemorial  custom.  Another  story 
from  another  backward  country  relates  how  an  enterprising 
American  undertook  to  substitute  some  well-made  American 
carts  for  the  exceedingly  clumsy  and  inefficient  carts  then  in 
use.  The  native  teamsters  refused  to  adopt  the  innovation, 
giving  as  their  reason  that  the  new  carts  were  too  silent,  that 
they  missed  the  screeching  made  by  the  wheels  turning  on  the 
heavy  wooden  axles  of  their  old  carts.  Similar  illustrations 
could  be  repeated  by  the  hundred  if  necessary.  No  nation 
whose  people  are  so  unteachable  as  these  illustrations  indicate 
is  likely  to  become  prosperous,  or  great  in  any  sense,  no  matter 
how  well  endowed  it  may  be  with  natural  resources.  Such 
nations  will  always  remain  at  the  mercy  of  the  stronger  nations 
and  will  survive  only  because  their  stronger  neighbors  show 
enough  moral  self-restraint  to  refrain  from  conquering  them. 

This  difficulty  is  not  simply  a  lack  of  knowledge.  It  is  more 
fundamental  than  that.  It  is  a  habit  of  mind  which  resists 
knowledge,  —  which  refuses  to  accept  knowledge  even  when 
it  is  presented.  Whether  this  is  due  to  some  defect  in  the 
physiology  of  the  people  or  merely  to  bad  teaching  in  the 
past,  it  may  be  difficult  to  determine.  That  there  are  constitu- 
tional differences  of  this  kind  among  peoples  there  can  be 
little  reasonable  doubt.  To  some  the  pain  of  a  new  idea  is  so 
considerable  that  they  prefer  to  endure  poverty  and  hardship 
rather  than  the  painful  process  of  learning  better  ways  of  doing 
things.  To  others  the  painfulness  of  learning  is  so  slight  as 
to  place  no  obstacles  in  the  way  of  progress.  On  the  other 
hand,  a  wise  but  strong  ruler  who  would  establish  a  system  of 
compulsory  education  and  rigidly  enforce  it  could  doubtless 
accomplish  a  great  deal  in  the  way  of  increasing  the  teachable- 
ness of  the  people.  During  their  enforced  schooling  they 
would  form  the  habit  of  learning,  and  the  pain  of  a  new 
idea  would  be  greatly  reduced.  A  wise  majority  in  a  democracy 
might  do  the  same  thing  for  an  unwise  minority. 


112  PRINCIPLES  OF  POLITICAL  ECONOMY 

Even  in  what  passes  for  a  progressive  nation,  and 
among  people  who  are  ranked  as  moderately  intelligent,  there 
survive  many  practices  which  can  only  be  regarded  as  super- 
stitions. Some  farmers  still  plant  their  potatoes  in  the  dark  of 
the  moon  rather  than  when  the  soil  and  the  weather  conditions 
are  right.  Others  observe  ceremonies  of  various  kinds  which 
have  not  the  slightest  relation  to  the  laws  of  plant  or  animal 
growth.  Still  others  refuse  to  submit  to  rules  or  to  adopt 
practices  which  have  been  proved  to  have  scientific  value, 
either  because  it  is  contrary  to  their  religion  or  because  it  is 
not  the  way  they  and  their  fathers  have  always  done.  Among 
others  besides  farmers  there  is  sometimes  a  prejudice  against 
"book  learning"  even  after  the  book  learning  has  proved 
itself  a  practical  thing. 

Covetousness.  There  is  another  form  of  unreasonableness, 
and  it  is  probably  the  most  destructive  of  all,  which  takes  the 
form  of  jealousy  or  resentfulness  at  the  success  of  other  people. 
It  is  the  worst  form,  perhaps  the  only  real  form,  of  covetous- 
ness.  There  are  few  things  which  so  deaden  the  enterprising 
and  constructive  spirit  of  a  people  as  this  form  of  resentfulness, 
and  there  are  few  things  which  so  encourage  that  spirit  as 
a  generous  appreciation,  on  the  part  of  everyone,  of  real 
achievement  wherever  it  is  found. 

Obedience  to  law.  Another  important  element  in  reasonable- 
ness is  the  recognition  of  the  fact  that  if  we  are  going  to  live 
together  in  groups,  it  is  necessary  for  each  of  us  to  submit  to 
many  regulations,  some  of  them  at  times  irksome,  which  would 
be  unnecessary  if  we  could  live  as  isolated  individuals.  This 
is  commonly  called  obedience  to  law.  This  need  not  be  a 
slavish  acceptance  of  all  laws  as  they  now  stand,  but  it  at 
least  involves  a  recognition  of  the  orderly  and  legally  constituted 
methods  of  changing  laws,  rather  than  a  stubborn  and  brutal 
defiance  of  those  which  we  do  not  happen  to  like.  The  pur- 
pose of  law  is  not  to  repress  or  obstruct,  but  to  make  free,  — 
to  release  energy.  The  traffic  policeman  on  a  crowded  street 


THE  QUALITY  OF  THE  PEOPLE  113 

corner  may  be  taken  as  a  good  illustration  of  all  enforcement 
of  law.  He  is  not  there  to  obstruct  or  hinder  traffic,  though 
he  does  undoubtedly  hinder  some  unreasonable  people  from 
doing  what  they  would  like  to  do.  But  as  the  result  of  such 
hindrances,  traffic  can  move  more  freely  than  it  could  without 
them,  and  thus  the  average  person  actually  enjoys  greater 
freedom  of  movement  than  would  otherwise  be  possible.  A 
reasonable  person  always  recognizes  this  fact  and  submits  to 
such  regulations.  Only  an  unreasonable  person  finds  them 
irksome  or  refuses  a  willing  obedience. 

The  world  has  generally  been  dominated  by  peoples  who 
were  law-abiding.  No  nation  whose  people  refuse  to  submit 
to  the  necessary  regulations  could  ever  hope  to  grow  prosperous 
or  powerful  enough  to  play  much  of  a  part  in  civilization.  It 
would  be  as  reasonable  to  expect  a  disorganized  mob,  each 
individual  of  which  followed  his  own  whims,  to  succeed  against 
a  well-organized  and  well-disciplined  army.  The  type  of  disci- 
pline and  regulation  is  different,  but  the  necessity  is  just  as  great 
in  a  nation  at  peace  as  in  a  nation  at  war.  The  results  of  a 
lack  of  discipline  come  more  quickly  in  war  than  in  peace, 
but  they  are  no  more  certain  in  the  one  case  than  in  the 
other.  It  is  particularly  important  that  this  kind  of  reasonable- 
ness shall  exist  in  a  democracy.  Under  a  despotism  the 
subjects  may  be  compelled  by  fear  to  submit  to  regulations ; 
in  a  democracy  it  must  be  largely  voluntary.  In  other  words, 
it  depends  upon  the  reasonableness  of  the  people. 

Willingness  to  cooperate.  Willingness  to  cooperate  where 
cooperation  is  desirable,  even  without  legal  compulsion,  is  a 
very  important  factor  in  the  prosperity  of  any  community. 
Even  where  everyone  agrees  that  cooperation  is  needed,  it  is 
frequently  difficult  to  get  people  to  cooperate  for  community 
work.  The  reasons  are  many,  and  some  of  them  are  hard  to 
understand.  Personal  jealousies,  old  grudges,  mutual  distrust, 
and  even  general  all-round  meanness  are  given  as  the  prin- 
cipal reasons.'  It  is  sometimes  said  that  the  lack  of  leaders  is 


114          PRINCIPLES  OF  POLITICAL  ECONOMY 

the  great  difficulty.  It  is  quite  as  frequently  the  lack  of  fol- 
lowers. Everyone  wants  to  be  a  leader  and  is  not  willing  to 
follow  anyone  else.  One  of  the  vices  of  democracy  shows 
itself  in  many  cooperative  enterprises.  Instead  of  supporting 
a  leader  who  really  knows  what  ought  to  be  done  and  how  to 
do  it,  it  frequently  happens  that  the  only  leader  who  can  win 
support  is  the  one  who  can  wheedle  the  different  factions  into 
a  cooperative  mood.  His  fitness  does  not  consist  in  the  fact 
that  he  is  an  expert  in  the  work  which  is  to  be  done  by  the 
group,  but  in  the  fact  that  he  is  an  expert  in  the  arts  of  per- 
suasion, —  that  he  is  the  only  one  who  can  overcome  the 
unwillingness  of  the  various  factions  to  cooperate.  If  they 
were  willing  to  cooperate,  this  sort  of  leader  would  not  be  a 
necessity,  and  they  could  then  choose  a  leader  who  was  an 
expert  in  the  work  to  be  done. 

Even  in  the  larger  sense,  the  nation  is  weak  if  it  must  be 
led  by  one  who  knows  very  little  about  the  actual  business  in 
hand,  but  knows  only  how  to  placate  various  factions  and  per- 
suade them  to  undertake  the  work  before  them.  With  such  a 
spirit  among  the  people  the  indispensable  man  is  more  likely 
to  be  the  orator  or  the  persuader  than  the  statesman  or  the 
administrator.  A  people  among  whom  the  efficient  man 
is  popular  will  never  be  outstripped  in  the  arts  of  peace, 
or  beaten  in  war,  by  a  people  among  whom  only  a  dema- 
gogue or  even  a  persuasive  orator  can  be  popular.  A  people 
who  lack  the  willingness  to  cooperate  in  the  carrying  out  of 
great  national  plans  and  programs  must  be  persuaded  or 
wheedled.  Lacking  a  despot,  their  first  need  is  for  someone 
who  can  wheedle  them  into  doing  that  which  they  ought 
to  be  willing  to  do  without  wheedling.  Nothing  more  unerr- 
ingly indicates  the  quality  of  the  people  than  the  kind 
of  leaders  they  pick  out  or  follow.  If  they  habitually  allow 
themselves  to  be  led  by  men  who  are  proficient  merely  in 
the  arts  of  persuasion,  they  are  a  weak  people.  Even  that 
which  is  sometimes  called  executive  ability,  and  which  is  too 


THE  QUALITY  OF  THE  PEOPLE  115 

often  a  convenient  excuse  for  much  stupidity,  is  made  neces- 
sary mainly  because  people  are  too  weak  and  vacillating  to  do 
what  they  ought  to  do  without  a  great  deal  of  looking  after. 
If  the  people  choose  as  their  leaders  men  who  have  clear  and 
sound  ideas  and  marked  scientific  or  constructive  ability,  re- 
gardless of  their  proficiency  either  in  the  arts  of  persuasion  or 
in  the  bluster  of  the  "  great  executive,"  they  are  a  strong 
people.  As  the  late  William  James  pointed  out,  one  of 
the  purposes  of  an  education  is  to  enable  us  to  pick  out  a 
good  man. 

If  we  are  clear  in  our  minds  as  to  a  few  of  the  leading  quali- 
ties which  a  capable  race  must  possess,  the  next  question  is, 
How  may  a  nation  improve  or  preserve  its  capacity  for  great- 
ness ?  Our  original  qualities  depend  mainly  upon  heredity ;  our 
acquired  qualities,  upon  education.  Education  depends  mainly 
upon  the  educational  system  and  the  advantages  which  civiliza- 
tion provides  for  the  accumulation  and  transmission  of  knowl- 
edge. Few  of  us,  unless  we  have  thought  seriously  about  it, 
realize  how  much  of  our  present  knowledge  is  due  to  the  art 
of  printing.  By  means  of  the  printed  book  the  knowledge 
acquired  by  one  generation  may  be  stored  up  and  bequeathed 
to  future  generations.  Without  the  printed  book  it  would 
have  to  be  transmitted  from  generation  to  generation  on  the 
thin  air  by  means  of  the  spoken  word.  Much  that  is  wonder- 
ful has  been  transmitted  orally,  but  much  has  also  been  lost. 
Such  a  thing  as  a  lost  art  is  scarcely  possible  in  this  age 
of  printing  presses.  But,  while  much  of  our  knowledge  is 
due  to  the  art  of  printing,  more  perhaps  is  due  to  the  organ- 
ized plans  for  training  each  generation  during  its  growing 
period.  A  school  system  which  gives  each  and  every  child 
just  the  training  which  he  needs  to  fit  him  for  the  greatest 
usefulness  is  the  dream  of  all  educators. 

Heredity  and  training.  A  great  deal  has  been  written  re- 
garding the  comparative  importance  of  heredity  and  training 
in  the  determination  of  ability  and  character.  Some  have  gone 


Il6          PRINCIPLES  OF  POLITICAL  ECONOMY 

to  the  extreme  of  saying  that  heredity  is  everything,  that  a 
genius  will  always  become  a  genius  in  spite  of  the  lack  of 
educational  advantages,  —  in  short,  that  he  will  find  his  own 
means  of  education.  Others  have  gone  so  far  as  to  deny  that 
heredity  has  anything  to  do  with  a  man's  ability ;  they  claim 
that  it  is  all  in  his  education,  including  under  education  all  the 
influences  which  have  been  at  work  since  his  birth  in  develop- 
ing his  mind  or  shaping  his  character.  The  truth,  as  in  most 
such  cases,  seems  to  be  somewhere  between  these  extremes. 
There  is  no  doubt  whatever  that  men  of  average  natural 
ability  may  be  greatly  improved  by  education  and  training, 
nor  is  there  any  reasonable  doubt  that  some  are  capable  of 
being  trained  much  more  highly  than  others  because  of  a 
difference  in  natural  ability. 

If  we  consider  certain  special  fields  of  study,  —  for  example, 
music  or  mathematics,  —  few  will  doubt  that  there  are  differ- 
ences in  natural  talent  for  these  studies.  Any  normal  person 
can  acquire  some  skill  in  either  of  these  fields,  but  there 
are  some  who  are  so  deficient  in  natural  talent  for  one  or 
the  other  that  no  amount  of  training  would  ever  enable  them 
to  become  highly  proficient.  There  is  a  strong  probability 
that  the  same  may  be  said  of  any  special  kind  of  ability  or 
skill  which  might  be  named ;  but  in  our  complex  civilization 
so  many  kinds  of  ability  and  skill  are  required  that  almost 
anyone  can  find  some  field  of  work  in  which  he  may  excel, 
though  there  may  be  no  good  market  for  the  kind  of  work  in 
which  he  excels,  or  there  may  be  so  many  others  possessing 
the  same  kind  of  ability  as  to  overstock  the  market.  In  either 
case  the  individual,  however  skillful  or  capable  in  that  special 
field,  may  find  it  hard  to  make  a  living. 

Whatever  may  be  said  regarding  the  relative  importance 
of  the  natural  ability  of  the  people  and  their  training,  it  is 
absolutely  certain  that  it  is  more  important  for  the  present 
generation  to  give  attention  to  the  problem  of  its  own  training 
than  to  the  problem  of  its  own  heredity.  The  latter  cannot 


THE  QUALITY  OF  THE  PEOPLE  117 

now  be  changed,  and  there  is  no  use  worrying  about  it.  The 
only  thing  to  do  is  to  make  the  most  of  its  inheritance  and 
see  that  it  gets  the  best  possible  training.  But  when  we  look 
to  the  future,  there  is  much  to  be  said  in  favor  of  giving  atten- 
tion to  the  question  of  the  heredity  of  future  generations.  If  the 
most  capable  men  and  women  of  this  and  succeeding  genera- 
tions marry  and  have  larger  families  than  the  less  capable,  and 
if  the  least  capable,  the  feeble-minded,  and  the  defective  are 
prevented  from  reproducing  their  kind,  we  may  expect  a 
gradual  improvement,  generation  after  generation,  in  the  native 
and  inherited  quality  of  the  stock.  If,  on  the  other  hand, 
many  of  the  most  capable  do  not  marry  at  all,  and  if  the  others 
marry  late  and  have  small  families,  whereas  the  less  capable 
have  larger  families,  while  the  feeble-minded  and  defective 
multiply  most  rapidly  of  all,  we  must  expect  a  gradual 
deterioration  in  the  stock,  generation  after  generation. 

The  age  of  marriage.  Aside  from  the  difference  in  the  size 
of  families,  the  mere  difference  in  the  age  of  marriage  will 
make  a  great  difference  in  the  rate  of  increase  of  different 
classes.  Let  us  suppose,  for  example,  that  there  are  two 
groups  of  people,  which  we  will  call  groups  A  and  B,  contain- 
ing a  thousand  persons  each,  each  group  having  different 
habits  with  respect  to  the  age  of  marriage.  In  group  A  mar- 
riages take  place  so  early,  on  the  average,  that  there  is  an 
average  of  twenty-five  years  between  generations.  That  is,  the 
average  parent  is  just  twenty  five  years  older  than  the  average 
child,  enough  children  being  born  before  the  parents  are 
twenty-five  to  balance  those  who  are  born  afterward.  In  group 
B,  on  the  other  hand,  marriages  take  place  so  late  that  there 
is  an  average  of  thirty-three  and  a  third  years  between  genera- 
tions. Let  us  assume,  further,  that  the  number  of  children 
brought  to  maturity  in  the  average  family  is  the  same  in  the 
two  groups,  and  that  this  average  number  is  four ;  that  is, 
in  both  groups  the  average  married  couple  brings  four  children 
to  maturity  and  marries  them  off.  The  total  number  in  each 


Ii8          PRINCIPLES  OF  POLITICAL  ECONOMY 

group,  therefore,  doubles  in  each  generation.  But  group  A 
will  double  four  times  in  a  hundred  years,  whereas  group  B 
will  double  only  three  times.  Under  these  circumstances 
group  A  will  have  increased  from  one  thousand  to  sixteen 
thousand  at  the  end  of  a  hundred  years,  whereas  group  B  will 
have  increased  to  only  eight  thousand.  If,  in  addition  to  this, 
group  B  should  have  fewer  children  on  the  average,  so  that 
they  doubled  only  once  in  two  generations,  the  contrast  is  still 
greater.  In  this  case  they  would  number  only  three  thousand 
at  the  end  of  a  hundred  years.  If,  through  so  many  failing  to 
marry  at  all,  and  the  rest  having  so  few  children,  they  should 
not  increase  at  all  from  generation  to  generation,  the  two 
groups,  at  the  end  of  the  century,  would  bear  the  ratio  of  16  to  I. 
Now  it  is  rather  obvious,  is  it  not,  that  it  makes  a  great  deal 
of  difference  whether  group  A  represents  the  more  capable 
men  and  women  in  our  nation,  and  group  B  the  less  capable, 
or  vice  versa. 


CHAPTER  X 

THE  DIVISION  OF  LABOR 

As  suggested  in  Chapter  VIII,  labor,  land,  and  capital  are 
the  elements  out  of  which  national  prosperity  is  built.  Of 
these  by  far  the  most  important  is  labor,  since  we  include 
under  that  term  both  mental  and  physical  exertion.  It  was 
also  stated  that  the  efficiency  of  labor  depends  upon  two  factors  : 
the  natural  ability  of  the  people  and  their  training.  But  there 
are  many  things  involved  in  training  which  are  not  taught  in 
schools  or  learned  in  shops  or  business  houses.  The  general 
attitude  of  mind  of  the  whole  people,  their  outlook  on  life, 
their  personal  habits,  their  systems  of  morals,  and  even  their 
religion,  all  have  their  share  in  the  efficiency  of  the  people. 
The  efficiency  of  labor  depends  also,  to  a  large  degree,  upon 
its  organization  and  the  opportunity  for  specialization. 

Adam  Smith  begins  his  great  "  Inquiry  into  the  Nature  and 
Causes  of  the  Wealth  of  Nations  "  with  a  discussion  of  the 
division  of  labor.  Other  writers,  both  ancient  and  modern, 
had  commented  on  the  great  fact  of  interdependence  of  indi- 
viduals in  society,  but  no  one  had  gone  into  such  detail  or 
shown  so  clearly  just  why  a  minute  division  of  labor  was  so 
advantageous.  His  statement  of  the  case  has  scarcely  been 
improved  upon  up  to  the  present  day,  though  many  of  his 
illustrations  are  out  of  date. 

Meaning  of  the  division  of  labor.  By  a  division  of  labor  he 
means,  first,  a  system  under  which  no  one  produces  everything 
he  needs,  but  each  one  confines  himself  to  the  production  of 
that  one  thing  or  those  few  things  for  the  production  of  which 
he  is  best  fitted,  exchanging  his  surplus  product  for  the  surplus 
products  of  others  who  are  specializing  on  other  things  ;  second, 

119 


120          PRINCIPLES  OF  POLITICAL  ECONOMY 

the  process  of  dividing  up  the  work  involved  in  the  making  of 
a  given  article  (each  man  performing  a  single  part)  and  then 
assembling  all  the  parts,  producing  a  complete  whole.  He 
mentions  the  nail  makers  of  his  day  as  illustrations  of  the  first 
form.  A  common  blacksmith  having  many  other  kinds  of 
work  to  do  could  never  become  very  skillful  at  nail  making, 
but  one  who  did  nothing  else  except  to  make  nails  became 
very  skillful  and  could  make  in  the  course  of  a  day  several 
times  as  many  as  a  common  blacksmith.  He  mentions  boys 
under  twenty,  who  had  never  learned  any  other  trade,  who 
could  make,  each  of  them,  upwards  of  two  thousand  three 
hundred  nails  in  a  day,  whereas  a  common  smith,  even  though 
he  were  accustomed  to  making  nails  occasionally,  could  sel- 
dom make  over  eight  hundred  or  a  thousand  in  a  day.  The 
second  form  of  the  division  of  labor  was  found  in  his  day  in 
the  making  of  pins.  The  work  of  making  a  pin  was  divided 
into  eighteen  different  operations,  each  operation  being  per- 
formed by  a  different  workman.  Of  course,  neither  nails  nor 
pins  are  made  nowadays  as  they  were  in  his  day ;  but  the 
division  of  labor  has  been  carried  even  farther.  They  are 
turned  out  by  automatic  machines,  but  the  machines  are  made 
by  one  set  of  men,  and  the  metal  is  mined,  smelted,  and 
prepared  by  different  groups ;  all  are  performing  parts  of  the 
work  of  making  nails  or  pins,  as  the  case  may  be.  Thou- 
sands of  other  illustrations  lie  all  about  us  if  we  choose  to 
look  for  them. 

Advantages.  Adam  Smith  names  three  distinct  advantages 
which  result  from  the  division  of  labor : 

First,  the  improvement  in  the  dexterity  of  the  workman  necessarily  in- 
creases the  quality  of  the  work  he  can  perform ;  and  the  division  of  labor, 
by  reducing  every  man's  business  to  some  one  simple  operation,  and  by 
making  this  operation  the  sole  employment  of  his  life,  necessarily  increases 
very  much  the  dexterity  of  the  workman.  .  .  .  Secondly,  the  advantage 
which  is  gained  by  saving  the  time  commonly  lost  in  passing  from  one  sort 
of  work  to  another,  is  much  greater  than  we  should  at  first  view  be  apt  to 
imagine  it.  It  is  impossible  to  pass  very  quickly  from  one  kind  of  work  to 


THE  DIVISION  OF  LABOR  1 21 

another  that  is  carried  on  in  a  different  place  and  with  quite  different  tools. 
.  .  .  Thirdly  and  lastly,  everybody  must  be  sensible  how  much  labor  is 
facilitated  and  abridged  by  the  application  of  proper  machinery.  It  is  un- 
necessary to  give  any  example.  I  shall  only  observe,  therefore,  that  the 
invention  of  all  those  machines  by  which  labor  is  so  much  facilitated  and 
abridged,  seems  to  have  been  originally  owing  to  the  division  of  labor.  Men 
are  much  more  likely  to  discover  easier  and  readier  methods  of  attaining 
any  object,  when  the  whole  attention  of  their  minds  is  directed  towards  that 
single  object,  than  when  it  is  dissipated  among  a  great  variety  of  things. 
But,  in  consequence  of  the  division  of  labor,  the  whole  of  every  man's 
attention  comes  naturally  to  be  directed  towards  some  one  very  simple 
object.  It  is  naturally  to  be  expected,  therefore,  that  some  one  or  other  of 
those  who  are  employed  in  each  particular  branch  of  labor  should  soon 
find  out  easier  and  readier  methods  of  performing  their  own  particular 
work,  wherever  the  nature  of  it  admits  of  such  improvement.  A  great  part 
of  the  machines  made  use  of  in  those  manufactures  in  which  labor  is  most 
subdivided,  were  originally  the  inventions  of  common  workmen.1 

Adam  Smith's  opinion  that  the  third  and  last  of  these  ad- 
vantages was  of  special  importance  has  been  fully  justified  by 
subsequent  experience.  Those  special  phases  of  the  division 
of  labor  which  he  so  aptly  illustrated  by  the  nail  makers  and 
the  pin  makers  of  his  day  scarcely  exist  now  except  in  some 
minor  industries.  The  nail  and  pin  makers  actually  made 
their  products  with  their  own  hands,  using  only  such  tools  as 
could  be  handled  and  driven  by  their  own  muscles.  Machines 
have  now  taken  the  place  of  the  simple  tool  of  that  day. 
Sometimes  these  machines  are  directed  and  fed  by  attendant 
laborers,  but  sometimes  they  are  so  perfected  as  to  require 
very  little  attention,  feeding  themselves  automatically  and 
stopping  automatically  when  anything  goes  wrong.  In  these 
cases  the  work  of  the  attendant  is  reduced  to  a  minimum, 
consisting  merely  in  starting  the  machines  and  putting  them 
in  order  when  anything  goes  wrong. 

Differences  between  a  tool  and  a  machine.  The  difference 
between  a  tool  and  a  machine  is  fairly  clear.  The  working 
part  of  a  tool  is  not  only  driven  but  guided  by  human  muscles. 

1  Wealth  of  Nations,  Chapter  I. 


122          PRINCIPLES  OF  POLITICAL  ECONOMY 

A  machine  may  be  driven  by  human  muscles,  but  the  working 
part  is  guided  by  the  machine  itself.  Besides,  the  power  is 
not  applied  directly  to  the  working  parts,  but  indirectly  through 
a  series  of  mechanical  devices  such  as  wheels,  pulleys,  levers, 
cranks,  etc.  For  example,  the  working  parts  of  a  sewing 
machine  are  the  needle  and  the  bobbin.  These  are  guided  by 
the  other  parts  of  the  machine,  and  the  power  is  applied 
indirectly.  It  is  therefore  a  machine,  even  though  it  is  pro- 
pelled by  the  muscles  of  the  operator ;  on  the  other  hand,  the 
needle  of  the  tailor  or  seamstress  is  not  only  propelled  but 
guided  by  the  worker.  The  hammer  of  the  blacksmith  is  a 
tool ;  a  steam  hammer  is  a  machine,  not  so  much  because  it 
is  driven  by  steam  as  because  the  working  part,  that  is,  the 
hammer  itself,  is  controlled,  guided,  and  made  to  strike  accu- 
rately by  other  parts  of  the  machine,  and  the  power  is  applied 
indirectly  through  mechanical  devices.  Even  in  the  case  of  a 
riveting  machine,  while  it  has  to  be  held  in  place,  the  actual 
blows  are  struck  in  rapid  succession  by  a  striking  part  which 
repeats  the  same  motion  over  and  over  again,  being  guided  in 
its  rapid  motion  by  other  parts  which  are  made  for  that 
purpose. 

Advantages  of  machinery.  The  advantages  of  the  machine 
over  the  tool  are,  first,  that  it  makes  possible  the  use  of  greater 
power  than  can  be  used  to  drive  a  tool ;  second,  that  it  can  be 
driven  at  much  greater  speed.  Since  the  working  part  is 
guided  accurately  by  the  mechanism  and  made  to  repeat  the 
same  operation  over  and  over  again,  the  only  limit  of  the  speed 
at  which  it  can  be  driven  is  that  fixed  by  the  strength  of  the 
materials  of  which  it  is  composed.  A  third  advantage  is  that, 
by  reason  of  the  power  which  may  be  used  to  drive  it,  and 
of  the  strength  of  the  materials  of  which  it  is  composed,  it 
can  perform  operations  which  no  tool,  whose  working  part 
is  guided  and  controlled  by  human  muscles,  could  perform. 
Perhaps  it  would  be  more  accurate  to  say  that  it  can  be  made 
to  control  working  parts  which  are  themselves  too  large  and 


THE  DIVISION  OF  LABOR  123 

heavy  to  be  guided  by  human  muscles.  The  working  part  of 
a  steel  rolling  mill,  for  example,  consists  of  the  rollers.  Obvi- 
ously no  human  hand  could  guide  such  powerful  instruments,  to 
say  nothing  about  driving  them.  They  are  held  in  place  and 
controlled  by  a  powerful  framework  and,  with  the  stupendous 
power  which  they  have  behind  them,  can  perform  gigantic  feats. 

The  fact  that  a  machine  is  only  capable  of  repeating  one 
operation  over  and  over  again  suggests  a  weakness.  It  can 
only  be  successfully  employed  where  there  are  operations  which 
have  to  be  repeated  a  great  many  times.  The  fact  that  sewing 
involves  the  making  of  many  stitches,  all  of  them  very  much 
alike,  makes  it  a  suitable  kind  of  work  for  a  machine.  The 
binding  of  sheaves  of  grain  is  another  operation  which  has  to 
be  repeated  a  vast  number  of  times  in  the  harvesting  of  a 
crop  ;  therefore  a  twine  binder  is  a  practical  machine.  Thresh- 
ing the  grain  with  a  flail  also  required  a  constant  repetition 
of  the  same  act ;  therefore  we  have  threshing  machines.  In 
short,  any  operation  which  has  to  be  repeated  without  variation 
a  great  number  of  times  is  suitable  for  machine  work. 

Human  ingenuity  is  now  able  to  construct  machines  which 
can  perform  any  operation,  however  delicate,  which  the  human 
hand  can  perform.  Anyone  who  has  seen  the  wonderful  ma- 
chines at  work  in  a  modern  watch  factory,  for  example,  will 
not  doubt  this  statement.  But  if  it  is  an  operation  which  does 
not  have  to  be  repeated  continuously  and  a  great  number  of 
times,  it  may  not  pay  to  build  a  machine  for  the  purpose.  It 
may  be  cheaper  to  do  the  work  by  hand.  Even  the  darning 
of  socks  and  the  patching  of  trousers  can  be  done  by  machinery  ; 
but  unless  it  were  done  on  such  a  large  scale  as  to  keep  a 
darning  machine  or  a  patching  machine  busy  a  good  part  of 
the  time,  it  will  be  cheaper  to  darn  and  patch  by  hand.  There 
are  still  a  good  many  operations  of  this  character,  especially  in 
the  household  and  also  in  agriculture,  the  greatest  of  all  our 
industries.  Much  work  must  still  be  done  by  hand  or  with  tools 
rather  than  machines. 


124          PRINCIPLES  OF  POLITICAL  ECONOMY 

Avoid  competing  with  machines.  By  way  of  digression  it 
may  be  pointed  out  that  young  people  who  are  looking  forward 
to  an  occupation  should  bear  in  mind  that  a  machine  can  do 
anything  which  can  be  reduced  to  a  routine,  or  a  constant  repe- 
tition of  the  same  act,  and  that  in  the  course  of  time  all  such 
work  will  probably  be  done  by  machines ;  therefore  any  occu- 
pation requiring  constant  repetition  ought  to  be  avoided  by 
everyone  who  is  intelligent  enough  to  be  trained  for  anything 
else.  No  machine  can  think  or  use  discretion  ;  therefore  it 
will  never  be  able  to  do  any  kind  of  mental  work  or  any  kind 
of  physical  work  which  requires  judgment>  discretion,  taste,  or 
tact.  Those  who  do  not  wish  to  compete  with  machines  will 
do  well  to  train  themselves  to  think,  to  use  discretion,  or  to 
exercise  taste  or  tact.  This  should  be  done  as  much  in  the 
interest  of  the  nation  as  in  the  interest  of  one's  self.  The 
nation  has  no  great  need  for  men  to  do  work  which  machines 
can  do  just  as  well.  What  it  needs  is  men  who  can  do  what 
machines  can  never  do. 

Two  kinds  of  division  of  labor.  As  suggested  above,  the 
division  of  labor  takes  on  a  somewhat  different  character  when 
highly  developed  machinery  comes  into  general  use.  This 
may  be  explained  further  by  pointing  out  two  kinds  of  division. 
One  has  been  called  contemporaneous  division  of  labor,  and 
the  other  successive  division  of  labor.  Under  the  contempora- 
neous division  of  labor  men  are,  at  the  same  time,  specializing 
in  different  lines  of  production.  One  group  is  producing, 
let  us  say,  breadstuffs  and  bread,  another  meat,  another  textile 
fabrics  and  clothes,  and  so  on,  each  group  bringing  some  kind 
of  raw  material  through  the  various  stages  of  production,  until 
it  matures  into  a  finished  product  ready  for  consumption.1  An- 
other phase  of  the  contemporaneous  division  is  found  when 
different  men  are,  at  the  same  time,  producing  different  parts 
of  the  same  product,  the  parts  being  later  assembled  into  a 
finished  whole.  Lumbermen  are  cutting  the  timber  which 

1  See  Taussig,  "  Wages  and  Capital,"  p.  6.    New  York,  1898. 


THE  DIVISION  OF  LABOR  125 

eventually  goes  into  a  house,  while  men  in  the  ore  beds  are 
getting  out  the  iron  ore  which  eventually  goes  into  the  house 
in  the  form  of  nails,  while  still  other  workmen  are  making  the 
brick  or  quarrying  the  stone  which  will  eventually  go  into  the 
foundations  and  the  chimneys. 

By  the  successive  division  of  labor  different  sets  of  men  are 
working  on  the  same  material,  bringing  it  forward  through  the 
successive  stages  of  maturity.  Thus,  following  the  choppers 
who  fell  the  trees  come  the  sawyers  who  saw  them  into  rough 
boards,  the  carriers  who  transport  the  boards,  the  men  in  the 
planing  mill  who  plane  them,  and  so  on,  until  the  carpenters  fit 
them  into  their  places  in  the  house.  The  iron  ore  goes  through 
another  series  of  stages,  as  does  every  bit  of  material  which 
enters  into  the  final  product. 

The  lengthening  of  the  process.  This  lengthening  out  of 
the  process  of  production,  making  it  extend  over  a  longer 
period  of  time,  is  one  of  the  most  striking  characteristics  of 
the  era  of  machine  production.  It  calls  for  more  foresight, 
more  planning  for  the  distant  future,  more  expenditure  of 
labor  and  investing  of  capital  long  in  advance  of  the  consump- 
tion of  goods,  than  was  ever  necessary  or  possible  in  any  pre- 
vious age.  There  is,  therefore,  under  this  regime,  a  greater 
demand  for  foresight,  for  thrift,  for  courageous  investment, 
for  the  hazarding  of  large  sums  on  the  chance  of  gains  in 
the  distant  future,  than  ever  before.  There  may  be  some  con- 
nection between  this  fact  and  the  fact  that  the  large  rewards, 
in  our  day,  go  to  the  men  who  exercise  foresight,  who  invest 
courageously  and  wisely,  who  hazard  their  time  and  wealth  on 
enterprises  which  can  only  bear  fruit  at  some  distant  day  in 
the  future ;  but  to  do  these  things  successfully  and  safely  re- 
quires great  wisdom.  Some,  however,  lacking  wisdom,  may 
blunder  into  success ;  but  those  who  blunder  are  much  more 
likely  to  blunder  into  failure. 

The  contemporaneous  division  of  labor  has  to  do  with  space ; 
that  is,  it  involves  the  doing  of  different  kinds  of  work  in 


126          PRINCIPLES  OF  POLITICAL  ECONOMY 

different  places  at  the  same  time.  This  calls  for  the  coordination 
of  that  labor  and  the  exchange  of  products  in  order  that  each 
specialist  or  specialized  group  may  get  the  advantage,  not  only 
of  its  own  efficiency,  but  of  that  of  other  specialists  and  spe- 
cialized groups.  Where  different  workers  are,  at  the  same  time, 
but  in  different  places,  working  on  different  parts  of  the  same 
product,  it  is  necessary  that  someone  should  coordinate  their 
work.  In  a  great  automobile  factory,  for  example,  there  are 
many  different  parts  being  produced  simultaneously.  In  order 
that  these  parts  may  all  be  assembled  and  fitted  together,  there 
must  be  very  careful  planning  and  organization.  This  is  what  is 
meant  by  the  coordination  of  labor  performed  in  different  places. 
The  time  element.  The  successive  division  of  labor  has  to 
do  with  time ;  that  is,  it  involves  doing,  at  different  times,  by 
different  men,  different  parts  of  the  work  of  completing  an 
article.  In  the  same  automobile  factory  the  same  piece  of 
material  is  worked  upon  by  many  men  in  a  regular  order 
of  succession.  This  calls  for  the  coordination  of  labor  per- 
formed at  different  times.  The  lengthening  out  of  the  process 
of  production  in  the  whole  of  modern  society  makes  this  form 
of  coordination  peculiarly  important.  Its  greatest  importance, 
however,  is  found  outside  any  individual  factory.  Before  the 
automobile  factory  could  be  built,  there  must  have  been  much 
work  done  in  procuring  the  raw  materials  for  the  building  and 
the  machines,  in  producing  food  and  clothing  for  laborers,  and 
in  doing  a  multitude  of  other  things.  Similarly,  before  shoes 
can  be  made,  cattle  must  be  raised,  slaughtered,  and  their  hides 
tanned  ;  shoe  factories  must  be  erected  and  equipped  with  prod- 
ucts from  the  mines  and  forests,  and  a  vast  amount  of  prepa- 
ration made  in  other  ways.  The  labor  of  the  herdsman  must 
be  coordinated  with  that  of  the  clerk  in  the  shoe  store ;  other- 
wise we  should  not  have  shoes  as  we  now  have  them.  Unless 
this  coordination  is  brought  about,  the  same  man  would  have 
to  kill  the  animal,  skin  it,  tan  the  hide,  and  go  through  all  the 
processes  necessary  to  the  finishing  of  a  pair  of  shoes. 


THE  DIVISION  OF  LABOR  127 

Territorial  division  of  labor.  In  one  of  its  broader  aspects 
the  contemporaneous  division  of  labor  is  known  as  the  terri- 
torial division  of  labor.  This  is  what  takes  place  when  one 
region  produces  that  for  which  it  is  best  fitted,  and  exchanges 
its  surplus  for  the  surplus  of  other  regions  which  are  also  spe- 
cializing on  those  products  for  which  they  are  best  fitted.  Thus, 
our  Middle  Western  states  of  the  upper  Mississippi  Valley  pro- 
duce hay,  grain,  and  livestock,  not  only  to  supply  bread,  meat, 
and  dairy  products  for  themselves,  but  for  the  rest  of  the  country 
as  well,  besides  sending  a  great  deal  abroad.  The  South  grows 
cotton  enough  to  supply  the  greater  part  of  the  world.  Both 
regions  receive  in  exchange  for  these  farm  products  the  manu- 
factured products  of  the  Eastern  states  and  foreign  countries, 
and  the  mineral  products  of  the  mountain  states  and  the  upper 
regions  of  the  Great  Lakes. 

It  is  the  territorial  division  of  labor  which  gives  rise  to  the 
important  business  of  transporting  goods  from  one  region  to 
another.  Obviously,  if  one  region  should  find  it  advantageous 
to  produce  everything  needed  or  desired  by  its  inhabitants,  there 
would  be  no  occasion  for  transporting  goods  into  it.  Similarly, 
if  it  did  not  produce  a  surplus  of  something  or  other  which 
could  be  sold  on  an  outside  market,  there  would  be  no  occasion 
for  transporting  goods  outward.  At  the  same  time,  the  terri- 
torial division  of  labor  is  made  possible  by  the  transportation 
of  goods,  and  tends  to  grow  in  importance  in  proportion  as 
transportation  becomes  cheaper  and  more  efficient.  A  slight 
advantage  in  the  exchange  of  products  might  easily  be  over- 
come by  a  heavy  transportation  cost.  For  example,  even  though 
New  England  cannot  grow  wheat  so  economically  as  Kansas  or 
North  Dakota,  yet,  if  the  cost  of  transporting  wheat  over  the 
intervening  distance,  and  of  transporting  manufactured  products 
back  to  pay  for  the  wheat,  were  very  high,  New  England  might 
find  it  advantageous  to  grow  her  own  wheat,  and  the  states 
which  now  produce  wheat  might  find  it  advantageous  to  do 
their  own  manufacturing. 


128          PRINCIPLES  OF  POLITICAL  ECONOMY 

The  advantages  of  a  territorial  division  of  labor,  where  the 
transportation  problem  is  solved,  are  similar  to  those  which 
result  from  a  division  of  labor  among  individuals  in  the  same 
neighborhood.  If  it  is  profitable  for  each  individual  to  spe- 
cialize upon  the  work  for  which  he  is  best  fitted,  it  is  equally 
profitable  for  each  neighborhood  to  specialize.  In  almost  any 
neighborhood,  however,  there  is  some  diversity  of  soil  and 
natural  resources,  as  well  as  a  diversity  of  talents  among  the 
people.  Therefore  it  will  seldom  happen  that  a  whole  neigh- 
borhood, much  less  a  whole  region  of  considerable  size,  can 
profitably  specialize  upon  a  single  product.  It  is  more  likely 
to  happen  that  a  whole  neighborhood  or  region  will  find  it 
advantageous  to  specialize  upon  a  number  of  products.  Thus, 
New  England,  the  South,  and  the  corn  belt  each  produces 
a  considerable  variety  of  products,  but  each  also  finds  it  advan- 
tageous to  import  a  considerable  variety  of  other  products. 
New  England,  for  example,  probably  secures  her  bread  and 
meat  at  less  cost  to  herself  by  devoting  most  of  her  energy  to 
manufacturing  and  then  exchanging  her  manufactured  prod- 
ucts for  the  wheat  and  beef  of  the  West  than  she  would  if 
she  tried  to  grow  these  important  food  products  on  her  own  soil. 
Let  us  suppose  that  the  labor  of  an  average  man  will  produce 
in  a  year  eight  hundred  dollars'  worth  of  goods  in  an  average 
New  England  factory,  but  only  six  hundred  dollars'  worth  of 
wheat  on  an  average  New  England  farm.  Let  us  assume  that 
it  costs  twenty-five  dollars  to  ship  his  goods  west,  and  seventy- 
five  dollars  to  ship  the  wheat  east.  Let  us  assume,  further, 
that  in  the  wheat-growing  sections  of  the  West  the  labor  of 
an  average  man  will  produce  a  thousand  dollars'  worth  of  wheat, 
and  only  eight  hundred  dollars  worth  of  goods  in  a  factory.  It 
can  easily  be  figured,  so  long  as  the  conditions  remain  as  we 
have  assumed  them  to  be,  that  the  wheat  section  can  get  more 
satisfactory  products  for  its  labor  by  growing  wheat  than  by 
manufacturing,  and  that  New  England  can  get  more  wheat 
for  her  labor  by  manufacturing  than  by  growing  wheat. 


THE  DIVISION  OF  LABOR  129 

International  division  of  labor.  When  the  territories  con- 
sidered are  not  different  sections  of  the  same  country  but  dif- 
erent  countries,  we  have  what  is  known  as  the  international 
division  of  labor.  Were  it  not  for  certain  uneconomic  factors 
which  enter  into  the  problems  of  national  life  and  existence, 
everything  which  can  be  said  in  favor  of  a  territorial  division 
of  labor  and  freedom  of  exchange  within  a  country  could  also 
be  said,  and  with  equal  force,  in  favor  of  an  international 
division  of  labor.  The  chief  of  these  uneconomic  factors  is 
the  possibility  of  war.  War  is  the  greatest  disturber  of  normal 
economic  activities,  and  until  it  can  be  eliminated,  every  nation 
must  calculate  upon  its  possibility  and  be  prepared  for  it.  In 
case  of  war  a  nation  which  is  not  prepared  to  produce  all 
the  necessaries  of  life,  as  well  as  all  military  supplies,  may  find 
itself  helpless  before  a  foreign  enemy.  Its  only  other  hope 
would  be  to  keep  open  the  channels  of  commerce  which  con- 
nect it  with  outside  sources  of  supply,  but  this  is  one  of  the 
things  which  the  enemy  country  would  try  to  prevent. 

In  some  animal  societies,  and  especially  in  the  colonies  of 
certain  insects  such  as  bees  and  ants,  there  is  an  elaborate  and 
admirable  division  of  labor.  Elaborate  and  admirable  as  it  is, 
however,  it  is  rudimentary  as  compared  with  that  which  is 
found  in  any  highly  developed  industrial  society.  There  is  no 
such  minute  division  of  labor  and  extreme  specialization  as  is 
found  in  a  modern  factory ;  there  is  no  such  detailed  planning 
for  the  distant  future,  there  is  no  such  bringing  together  of 
materials  from  distant  places,  there  is  no  such  coordination  of 
labor  performed  at  such  widely  separated  times  and  places,  there 
is  no  such  system  of  exchange  as  we  see  carried  on  all  about 
us  in  our  own  communities.  If  you  will  study  the  various 
material  objects  on  your  dinner  table  and  find  out  all  about 
each  of  them,  you  will  find  that  literally  thousands  of  people, 
few  of  whom  you  ever  saw  or  heard  of,  or  who  ever  saw  or 
heard  of  one  another,  have  had  a  part  in  the  preparation  of 
your  meal  and  the  table,  dishes,  knives,  forks,  and  spoons 


130          PRINCIPLES  OF  POLITICAL  ECONOMY 

which  you  use.  It  is  through  the  system  which  we  have  called 
the  division  of  labor  that  you,  by  doing  a  very  few  useful  things 
and  doing  them  well,  find  a  considerable  variety  of  objects  on 
your  table  at  the  proper  time  without  your  having  given  much 
thought  to  any  one  of  them. 

No  preconceived  plan.  This  is  sometimes  called  the  organ- 
ization of  industry.  The  term  organization  may  be  a  little 
misleading,  though  not  necessarily  so.  It  seems  to  imply  that 
somebody  thought  it  all  out  or  planned  it)  and  then  organized 
the  system.  It  did  not  come  about  in  that  way.  The  process 
was  more  nearly  like  the  slow  growth  of  an  organism.  Each 
individual  has  looked  about  for  something  to  do  in  order  to 
earn  a  living,  and  has  taken  what  looked  to  him  at  the  time 
as  the  most  available  opportunity.  Wherever  there  was  a 
scarcity  of  workers,  there  has  been  an  opportunity  for  a  new 
worker.  Wherever  there  was  an  oversupply,  the  opportunity 
has  not  looked  so  good.  By  that  simple  process  in  which  each 
individual  chose  to  do  that  which  he  could  do  best,  the  whole 
elaborate  system  has  been  worked  out. 

Adam  Smith's  remarks,  quoted  earlier  in  this  chapter,  re- 
garding the  way  in  which  the  minute  division  of  labor  has 
aided  in  the  invention  and  improvement  of  machinery,  may 
be  applied  to  the  much  greater  problem  of  the  development 
and  improvement  of  a  great  and  complex  industrial  system. 
When  each  workman  spends  all  his  time  performing  a  single 
operation,  it  is  much  easier  for  him  to  devise  a  better  way  of 
doing  it  than  it  would  be  if  he  had  to  give  his  attention  to 
many  things.  It  is  probable  that  no  important  and  complicated 
machine  was  ever  invented  and  made  to  work  successfully 
without  a  great  deal  of  trying  out,  modification,  and  general 
improvement.  In  actual  use  many  weaknesses  in  the  machine 
are  revealed,  which  no  inventor,  however  wise,  could  have  fore- 
seen and  prevented.  What  is  sometimes  called  the  heroic 
theory  of  invention  does  not  actually  work  in  practice.  By  the 
heroic  theory  is  meant  the  theory  that  a  great  invention  springs, 


THE  DIVISION  OF  LABOR  131 

a  completed  whole,  from  the  mind  of  the  inventor,  as  Athena 
sprang  full-armed  from  the  head  of  Zeus.  The  fact  seems  to 
be  that  no  human  mind  is  capable  of  inventing  a  complete 
and  successful  machine  without  many  trials,  failures,  modifica- 
tions, and  detailed  and  piecemeal  improvements.  Even  such 
a  simple  device  as  a  bicycle  passed  through  a  long  and  inter- 
esting evolution  before  it  reached  a  stage  which  made  it  gen- 
ally  useful  and  popular.  The  automobile  is  another  illustration 
of  gradual  and  detailed  improvement  after  it  was  actually  in  use. 
If  it  is  impossible  for  any  human  intelligence  to  invent  and 
construct  at  once  a  satisfactory  automobile,  it  would  be  obvi- 
ously impossible  to  have  invented  and  organized  a  whole  indus- 
trial system.  It  would  present  an  infinitely  more  difficult  prob- 
lem than  the  invention  and  construction  of  any  machine  that 
was  ever  built.  It  has  been  by  age-long  trial  and  error,  varia- 
tion and  selection,  experiment  and  failure,  that  even  a  tol- 
erably successful  industrial  system  has  been  worked  out.  There 
are  doubtless  endless  improvements  yet  to  be  made,  but  they 
will  certainly  be  made  by  the  same  process  of  gradual  and 
piecemeal  adjustment.  Anyone  who  thinks  that  he  can  devise 
and  organize  a  better  system  than  the  present  shows,  by  the 
very  fact  that  he  thinks  so,  that  he  is  unfitted  for  the  task. 
He  shows  that  he  lacks  the  first  element  in  fitness  ;  namely,  a 
knowledge  of  the  vastness  of  the  problem  and  the  infinite 
number  of  difficulties  to  be  overcome.  It  is  different,  however, 
with  one  who  thinks  of  some  detail  in  the  present  industrial 
system  which  might  be  improved.  This  presents  a  problem 
worthy  of  the  greatest  minds,  and  it  also  furnishes  a  possibility 
of  genuine  achievement. 


CHAPTER  XI 
POWER 

Power  needed  for  moving  material  objects.  It  has  been 
pointed  out  in  Chapter  VIII  that  man's  work,  on  the  physical 
side  at  least,  consists  in  moving  material  objects.  For  this  work 
the  first  essential  is  power.  The  power  first  applied  was,  of 
course,  that  which  was  generated  in  his  own  body  and  exer- 
cised through  his  own  muscles.  But  the  secret  of  the  indus- 
trial success  of  modern  civilized  nations  lies  in  their  command 
of  other  sources  of  power  rather  than  in  any  superior  muscu- 
larity of  their  own. 

Animal  power.  The  first  of  these  other  sources  of  power 
which  man  utilized  on  a  large  scale  was  that  of  animals  which 
he  domesticated  and  enslaved.  They  are  still  one  of  the  most 
important  sources,  if  not  the  most  important  source,  of  power. 
According  to  the  Yearbook  of  the  United  States  Department 
of  Agriculture  there  were  on  the  farms  of  the  United  States 
on  January  I,  1916,  about  25,731,000  horses  and  mules,  to  say 
nothing  of  those  in  use  in  the  cities  and  towns.  The  latest  figures 
for  horses  and  mules  not  on  farms  are  those  given  in  the  cen- 
sus of  1910.  On  April  15  of  that  year  there  were  3,543,000. 
Assuming  that  there  were  as  many  in  1916,  it  would  bring  the 
total  up  to  29,184,000.  Some  of  those  on  farms,  of  course,  are 
colts  too  young  to  work.  Those  of  working  age,  both  on  farms 
and  not  on  farms,  are  probably  close  to  25,000,000.  Besides 
horses  and  mules,  a  few  oxen  are  still  used.  The  "primary 
horse  power"  (that  is,  horse  power  in  its  original  sense)  used 
in  manufacturing  in  the  United  States  in  1914  was  estimated 
at  22,547,574.  It  has  been  increasing  rapidly,  so  that  by  1916 
it  was  certainly  much  larger.  It  is  not  easy  to  compare  the 

132 


POWER  133 

actual  working  power  of  a  horse  with  that  of  the  horse-power 
unit  as  used  in  measuring  the  power  of  a  steam  engine,  but, 
assuming  that  they  are  equal,  it  would  appear  that  the  total 
animal  power  in  use  in  the  United  States  is  very  nearly  as  great 
as  the  total  steam  and  water  power  used  in  manufacturing. 

Among  the  animals  which  have  furnished  power  for  man's 
work  may  be  named  the  horse,  the  mule,  the  ass,  the  ox,  the 
buffalo,  the  camel,  the  elephant,  the  reindeer,  the  llama,  the 
dog,  and  the  goat.  Of  these,  the  most  important  for  the  north 
temperate  zone  is  the  horse,  though  the  ox  is  a  close  second. 
Originally,  in  fact  until  very  modern  times,  the  horse  was  used 
mainly  to  carry  man  himself  or  loads  of  material  on  his  back 
rather  than  for  traction  ;  that  is,  for  pulling  or  drawing  loads. 
Such  traction  as  he  was  required  to  perform  was  the  drawing 
of  war  chariots  and  carriages  of  state,  and,  later,  carriages  and 
vehicles  for  the  conveyance  of  travelers.  His  speed  fitted  him 
especially  for  this  work.  For  the  slower  and  heavier  work  of 
plowing,  harrowing,  and  drawing  heavy  loads  of  farm  produce 
the  ox  was  long  considered  superior.  In  the  first  place,  he  was 
larger  and  heavier  than  the  horses  of  that  day.  His  heavy 
body  and  short  legs  and  his  general  anatomy  seemed  to  fit  him 
peculiarly  for  pulling.  He  fights  by  pushing  with  his  head. 
This  seemed  to  call  into  play  the  same  muscles,  bones,  and 
joints  as  are  used  in  pushing  on  the  yoke.  During  the  last 
century  or  so  the  horse  and  the  mule  have  been  gradually 
displacing  the  ox  even  in  agriculture. 

Displacement  of  the  ox  by  the  horse.  Two  factors  have  con- 
tributed to  this  change  from  the  ox  to  the  horse  and  the  mule 
as  a  source  of  power  for  farm  work.  One  is  the  development 
of  large  and  heavy  breeds  of  horses  of  such  strength  and 
docility  as  to  fit  them  as  well  as  oxen  for  the  pulling  of  heavy 
loads.  The  other  is  the  development  of  farm  machinery.  All 
large  breeds  of  horses,  however,  have  been  developed  in  the 
northwestern  parts  of  Europe  ;  that  is,  in  Great  Britain,  northern 
France,  Belgium,  Holland,  and  Denmark.  Whether  this  is  due 


134          PRINCIPLES  OF  POLITICAL  ECONOMY 

to  something  in  the  soil  or  climate,  or  simply  to  the  ability  of 
the  people  of  those  countries  as  animal  breeders,  it  is  impos- 
sible to  say.  Russia  and  Hungary  are  also  horse-breeding  coun- 
tries and  use  horses  to  a  certain  extent  for  traction  purposes, 
but  they  have  not  produced  such  huge  draft  horses  as  the 
other  countries  mentioned.  The  United  States  is  also  breed- 
ing large  numbers  of  heavy  draft  horses,  but  we  have  imported 
our  breeding  stock  from  Great  Britain,  France,  and  Belgium. 
We  surpass  all  other  countries,  however,  in  the  number,  quality, 
and  speed  of  our  trotting  horses.  The  lighter  breeds  of  horses 
not  only  lack  the  weight  necessary  for  drawing  heavy  loads  but 
they  are  also  likely  to  be  too  nervous  and  excitable.  The 
United  States  and  Canada,  together  with  the  countries  which 
originated  the  heavy  breeds,  have  pretty  generally  substituted 
the  horse  and  the  mule  for  the  ox  even  in  farm  work. 

The  mule.  Southern  Europe  and  the  southern  part  of  the 
United  States  have  made  large  use  of  the  mule.  This  hybrid, 
combining  something  of  the  patience  and  endurance  of  the 
ass  with  the  size  and  strength  of  the  horse,  is  admirably 
adapted  to  farm  work  in  climates  where  the  huge  draft 
horses  of  the  north  suffer  from  the  heat,  and  where  the  lighter 
horses  of  the  south  are  too  nervous  and  excitable  for  the  slow, 
heavy  work  on  the  farm.  Even  the  ass  has  played  a  humble 
though  useful  role  by  furnishing  power  to  those  who  could  not 
afford  a  more  expensive  animal,  such  as  a  horse  or  a  mule. 

Both  the  horse  and  the  mule,  even  the  huge  draft  breeds, 
have  one  great  advantage  over  the  ox ;  that  is,  their  more  rapid 
gait.  While  they  cannot  trot  as  well  as  the  lighter  breeds  of 
horses,  they  can  trot  very  much  better  than  the  ox  and  they 
can  walk  much  faster,  and  in  farm  work  it  is  this  faster  walk 
which  counts. 

The  factor  which  has  had  a  great  deal  to  do  with  the 
substitution  of  the  horse  and  the  mule  for  the  ox  is  the  in- 
creased use  of  agricultural  machinery.  This  has  required  power 
of  a  superior  kind,  and  the  horse  has  proved  to  be  much  better 


POWER  135 

adapted  than  the  ox  to  the  drawing  and  handling  of  machinery. 
This  is  mainly  because  of  his  more  rapid  gait.  When  the 
farmer  has  his  money  invested  in  expensive  machinery,  it  is 
important  that  he  get  as  much  work  out  of  it  as  possible.  He 
can  scarcely  afford  to  allow  it  to  run  so  slowly  as  would  be 
necessary  if  it  were  drawn  by  oxen. 

Farm  machinery.  Still  another  factor  which  has  contributed 
to  this  end  is  the  higher  wages  for  farm  labor  in  the  countries 
of  northwestern  Europe,  Canada,  and  the  United  States.  If 
a  farmer  were  hiring  lahor  at  a  very  low  wage,  it  would  not 
be  so  important  that  he  get  the  most  possible  work  out  of  his 
hired  man.  But  when  labor  is  expensive,  it  works  very  much 
as  it  does  when  tools  and  machinery  are  expensive.  It  is  thus 
important  that  as  much  as  possible  shall  be  accomplished  by 
each  laborer.  It  is  therefore  better  to  give  him  a  fast-walking 
team  than  a  slow-walking  team. 

Historical  importance  of  the  ox.  The  ox,  however,  from  the 
most  ancient  times  until  quite  recently,  has  been  the  chief 
if  not  the  sole  draft  animal  of  all  the  races  that  have  used 
draft  animals  at  all.  His  docility  and  patience,  his  great 
strength,  the  cheapness  of  his  harness,  and  his  ability  to  find 
his  own  living  when  not  at  work,  contributed  to  make  him  a 
most  valuable  assistant  to  man  in  his  struggle  for  the  conquest 
of  the  earth.  In  the  pulling  of  the  heavy  wooden  plows  and 
harrows  that  were  in  use  before  the  modern  steel  tools  were 
invented,  and  the  lumbering  carts  that  were  in  use  before 
modern  vehicles  were  constructed,  he  enabled  men  to  cultivate 
the  soil  on  a  vastly  more  extensive  scale  than  would  have  been 
possible  by  human  muscles  alone.  He  thus  contributed  to  the 
production  of  food  for  increasing  populations  of  men,  and  in 
the  end  he  contributed  his  own  body  to  help  feed  them,  and 
his  own  hide  in  order  that  they  might  be  shod.  In  many 
parts  of  the  world  he  is  still  the  principal  draft  animal  for 
farm  work.  In  southern  Europe,  southern  Asia,  and  parts  of 
South  America  one  may  still  see  magnificent  teams  of  oxen 


136          PRINCIPLES  OF  POLITICAL  ECONOMY 

at  work  in  the  fields  and  drawing  carts  along  the  highways. 
They  move  with  a  steadiness  and  massiveness  which  give  the 
impression  of  irresistible  power,  but  they  are  too  slow  for 
most  of  our  hustling  Americans,  though  a  good  many  oxen 
are  used  in  the  rough  lands  of  New  England.  If  we  take  the 
whole  history  of  man's  use  of  power,  it  is  probable  that  the  ox 
has  furnished  more  in  the  aggregate  than  any  other  agency, 
not  excluding  coal  and  steam. 

Tropical  animals.  The  Asiatic  elephant  and  the  camel  are 
admirably  fitted  for  tropical  and  subtropical  countries,  the 
former  in  moist  and  the  latter  in  dry  climates.  The  African 
elephant  has  never  been  domesticated,  either  because  of  his 
fierce  and  intractable  disposition  or  because  the  natives  of 
Africa  did  not  care  to  domesticate  him.  It  is  a  remarkable 
fact  that  the  native  African  races  never  domesticate  any  animal, 
not  even  the  zebra,  which  appears  to  be  capable  of  domestica- 
tion. However,  no  other  race  has  reduced  any  animal  to 
domestication  since  prehistoric  times.  Prehistoric  man  was 
either  our  superior  in  this  art  or  else  we  have  not  sufficiently 
felt  the  need  of  any  more  animals.  The  prodigious  strength 
and  the  remarkable  intelligence  of  the  elephant  fit  him  for  a 
variety  of  operations  besides  pulling  loads.  He  requires  con- 
siderable quantities  of  coarse  fodder  such  as  grows  abundantly 
in  warm  and  moist  countries.  The  great  advantage  of  the 
camel  in  dry  countries  is,  of  course,  his  well-known  ability  to 
work  for  long  periods  without  water.  He  is  used  in  parts  of 
southwestern  Asia  and  northern  Africa  The  water  buffalo 
posseses  qualities  almost  the  opposite  of  those  of  the  camel ; 
that  is  to  say,  he  can  work  only  where  water  is  abundant  and 
easily  accessible,  not  only  for  drinking  but  for  frequent  bath- 
ing or  wetting  of  the  skin.  He  is  a  powerful  animal  and  well 
adapted  to  working  in  muddy  lands  and  irrigated  rice  fields. 

In  polar  regions,  where  vegetation  is  scarce,  the  problem  of 
animal  power  is  a  more  difficult  one.  Where  moss  and  lichens 
abound,  the  reindeer  is  a  valuable  source  of  power.  In  the 


POWER  r  37 

high  mountain  regions  of  Peru  the  llama  is  used  for  carrying 
loads  but  not  for  traction.  Where  forage  is  not  found  in 
sufficient  abundance,  but  where  meat  and  fish  can  be  provided, 
some  carnivorous  animal  has  to  be  used.  The  dog  is  the  only 
one  which  is  sufficiently  well  domesticated  to  serve  the  purpose. 

Solar  energy.  The  great  physical  source  of  power,  so  far  as 
man  has  been  able  to  develop  it,  is  understood  to  be  the  sun. 
The  amount  of  solar  energy  which  comes  to  the  earth  in  the 
form  of  light  and  heat  is  so  stupendous  as  to  bewilder  the 
imagination.  Its  most  important  service  is  in  the  promotion 
of  plant  growth,  and,  through  plants,  of  animal  growth  ;  but  it 
is  also  transformed  into  mechanical  power  in  a  number  of  ways. 

In  the  first  place,  it  vaporizes  water.  Since  the  air  is 
heavier  than  water  vapor,  the  latter  rises,  or,  more  literally,  the 
air  falls  through  gravitation.  When  this  water  vapor  reaches 
high  altitudes  and  is  congealed,  it  becomes  heavier  than  air 
and  falls  through  gravitation  in  the  form  of  rain,  snow,  etc. 
Some  small  fraction  of  it  falls  on  mountains  and  other  high 
portions  of  the  earth's  surface.  Gravitation  still  pulls  it  down- 
ward through  the  streams.  These  are  harnessed  and  made  to 
turn  water  wheels,  thus  furnishing  mechanical  power  to  do 
man's  work ;  that  is,  to  move  pieces  of  matter. 

In  the  second  place,  through  plant  growth  combustible 
material  is  stored  up  in  the  bodies  of  trees  and  other 
plants.  When  this  material  is  burned,  heat  is  developed  which 
may  be  used  to  vaporize  water.  In  the  form  of  vapor  the 
water  expands  and  may  be  made  to  push  a  piston,  which  is, 
again,  a  usable  form  of  mechanical  power  for  the  moving 
of  other  bodies.  The  accumulation  and  covering  over  of  vast 
masses  of  combustible  vegetable  material  in  previous  geological 
periods  gave  us  our  coal  beds,  which  have  recently  become  a 
principal  source  of  both  artificial  heat  and  mechanical  power. 
It  is  generally  supposed  that  petroleum  is  of  animal  origin. 
If  so,  it  is,  like  coal,  the  product  of  solar  energy  and  may  be 
used,  like  coal,  to  transform  water  into  steam.  The  internal 


138          PRINCIPLES  OF  POLITICAL  ECONOMY 

combustion  engine  is  a  later  development  and  is,  in  many 
ways,  a  superior  method  of  transforming  combustion  into 
mechanical  power. 

In  the  third  place,  the  direct  rays  of  the  sun  may  be  so  con- 
centrated as  to  produce  an  intense  heat,  which  may,  in  turn, 
be  used  to  transform  water  into  steam.  According  to  tradition, 
the  great  mathematician,  Archimedes,  burned  the  Roman  ships, 
which  were  besieging  his  native  city  of  Syracuse,  by  the  use 
of  a  large  number  of  mirrors.  By  reflecting  the  sun's  rays 
from  all  these  mirrors  upon  a  single  spot,  so  much  heat  was 
concentrated  as  to  set  the  ships  on  fire,  one  after  another. 
Whether  there  is  any  foundation  of  fact  for  this  story  or  not, 
there  is  no  doubt  as  to  the  possibility  of  producing  an  intense 
heat  by  the  concentration  of  the  rays  of  the  sun.  Anyone 
can  demonstrate  this  with  a  common  burning  glass.  Solar 
engines  have  already  been  constructed  which  make  use  of  con- 
verging mirrors  for  the  concentration  of  the  sun's  rays.  This 
produces  an  intense  heat,  which,  in  turn  converts  water  into 
steam  and  moves  a  piston. 

Winds.  In  the  next  place,  if  we  may  assume  that  winds  are 
in  general  caused  by  variations  in  temperature,  they  may  be 
said  to  be  derived  from  solar  energy.  This  mechanical  power, 
as  used  for  the  moving  of  boats,  has  been  of  the  very  greatest 
importance  in  the  development  of  commerce  and  the  spread  of 
civilization.  The  epoch-making  voyages  of  Columbus,  as  well  as 
the  voyages  of  great  numbers  of  men  less  noteworthy  than  he, 
were  made  possible  by  the  ingenuity  with  which  man  had  learned 
to  utilize  this  vast  source  of  power.  For  certain  kinds  of  station- 
ary work  which  does  not  have  to  be  performed  regularly,  such 
as  pumping  water,  grinding  grain,  etc.,  the  windmill  has  proved 
an  economical  device  for  utilizing  the  power  of  the  winds. 

Tides.  Another  source  of  power  of  which  some  use  has 
been  made  is  the  tide.  This  can  be  traced  to  the  momentum 
of  the  earth  rather  than  to  solar  energy.  The  rising  and  the 
falling  of  the  tides,  especially  along  coasts  with  many  inlets 


POWER  1 39 

and  estuaries,  have  created  opportunities  for  tide  mills  which 
can  be  made  to  do  certain  kinds  of  work. 

With  all  these  sources  of  power,  and  possibly  others  which 
may  be  developed,  there  is  no  likelihood  that  our  ingenious 
race  will  ever  be  compelled  to  fall  back  upon  its  own  muscles, 
or  even  to  depend  exclusively  upon  animal  power.  In  that  dis- 
tant day  when  our  coal  beds  and  oil  fields  are  exhausted,  the 
sun's  rays  will  still  continue  to  strike  the  earth.  That  being 
the  case,  trees  and  other  plants  will  still  grow,  though  wood 
could  scarcely  take  the  place  of  coal  and  petroleum.  Alcohol 
can  scarcely  become  as  cheap  as  gasoline  has  been  in  the  past, 
but  it  can  be  manufactured  in  considerable  quantities  from  a 
variety  of  plants.  Again,  the  rains  and  the  snows  will  continue 
to  feed  our  rivers  and  turn  our  water  wheels.  Electrical  trans- 
mission will  enable  us  to  utilize  many  streams  now  running  idly 
to  the  sea,  and  to  distribute  the  power  over  wide  areas  and  send 
it  long  distances  from  the  streams.  Solar  engines  may  be  so 
perfected  as  to  enable  us  to  utilize  the  inconceivable  and  inex- 
haustible flow  of  energy  which  comes  to  us  in  the  form  of  direct 
rays  from  the  sun.  The  winds  will  continue  to  blow  and  push 
our  sails  and  turn  our  windmills.  And  so  long  as  the  earth  con- 
tinues to  revolve  about  its  axis,  the  tides  will  continue  to  ebb  and 
flow,  and  these  may  furnish  us  considerable  quantities  of  power. 

Even  if  it  should  happen  that  none  of  these  sources,  nor  all 
of  them  combined,  should  furnish  power  quite  so  cheap  as  that 
which  we  now  enjoy  through  the  use  of  coal,  still  we  may  be- 
come so  well-to-do,  through  improved  agriculture,  improved 
technical  processes  for  utilizing  power,  and  more  rational  habits 
of  living,  as  to  enable  us  to  bear  the  extra  cost  of  these  other 
kinds  of  power  with  no  great  inconvenience.  Even  if  this 
should  not  happen,  it  must  not  be  forgotten  that  a  considerable 
number  of  civilizations  have  been  built  up  and  multitudes  of 
people  have  lived  comfortably  and  happily  with  no  power  ex- 
cept that  of  their  own  muscles,  their  domestic  animals,  the 
winds,  and  the  waterfalls. 


140          PRINCIPLES  OF  POLITICAL  ECONOMY 

The  steam  engine.  Next  to  the  yoking  of  the  ox  at  some  time 
in  the  prehistoric  past,  the  most  momentous  event  in  the  his- 
tory of  man's  power  was  the  invention  of  the  steam  engine. 
The  reason  why  this  was  so  momentous  was  that  the  coal  beds 
of  the  north  temperate  zone  furnish  a  vast  quantity  of  very 
cheap  and  very  concentrated  fuel.  It  is  difficult  to  see  how  the 
heat  of  burning  coal  could  have  been  transformed  into  mechani- 
cal power  in  any  other  economical  way.  The  great  cheapness 
and  economy  of  this  source  of  power  is  what  has  made  it  such 
a  powerful  factor  in  the  development  of  modern  industry.  By 
merely  vaporizing  water  in  a  boiler  by  means  of  this  cheap  fuel, 
enormous  pressure  can  be  exerted.  This  pressure  can  be  made 
to  move  a  piston.  From  this  point  on,  further  developments 
are  merely  the  results  of  mechanical  adjustments.  Whenever 
one  object,  such  as  a  piston,  can  be  made  to  move  as  we  want 
it  to  move,  other  objects  can  be  hitched  to  it  and  be  made  to 
move  also.  The  first  of  these  mechanical  adjustments  to  pro- 
duce great  results  was  when  the  moving  piston  was  made  to 
turn  a  wheel,  thus  converting  linear  motion  into  circular 
motion.  After  that  adjustment  was  made,  every  form  of  steam- 
driven  machinery  became  a  mechanical  possibility. 

Time  does  not  permit  us  to  mention  all  even  of  the  really 
important  adjustments  which  have  been  made  for  the  greater 
utilization  of  the  pressure  of  steam  on  a  movable  piston.  The 
economical  conversion  of  mechanical  power  into  electricity,  and 
of  electricity  back  into  mechanical  power,  has  enabled  us  to  uti- 
lize power  in  a  variety  of  ways  which  were  formerly  impractical, 
besides  giving  rise  to  an  electrical  industry  of  vast  proportions. 
The  internal  combustion  engine  has  made  possible  automobiles 
and  flying  machines. 

Roads.  The  subject  of  roads  and  tracks  would  furnish  an 
interesting  study  to  supplement  a  study  of  power.  The  better 
the  track,  of  course,  the  less  power  it  requires  to  move  an  object. 
This  would  include  everything  from  the  air  and  the  ocean, 
railway  tracks,  paved  streets,  and  dirt  roads,  down  to  the 


POWER 


141 


lubricated  grooves,  cylinders,  and  sockets  through  which  the 
parts  of  a  machine  are  made  to  move.  Roads,  streets,  and 
railway  tracks  will  be  discussed  under  the  head  of  transportation. 
The  rest  must  be  left  to  the  imagination  of  the  student. 


POWER 


Muscular 


,  Animal 


Mechanical 


Human 

Horses 

Mules 

Asses 

Oxen 

Buffaloes 

Yaks 

Elephants 

Camels 

Llamas 

Dogs 

Wind 

(  Streams 
Water  <  Waves 
[  Tides 

_     .  f  Steam  engines 

\  Internal-combustion  engines 

Solar  engines 


CHAPTER  XII 
LAND 

FACTORS  IN  THE  PRODUCTIVITY  OF  LAND 

.    f  i .  Solidity  .    f  i .  Location 

A.  NoneconomicX  B.  Economic^ 

L  2.  Extension  j.  2.  Fertility 

Noneconomic  properties  of  land.  Some  of  the  physical  and 
geometric  properties  of  land  which  are  the  most  fundamental 
are  not  the  most  important  from  an  economic  point  of  view. 
The  solidity  of  the  earth  which  serves  to  support  our  weight, 
and  that  of  the  buildings  which  we  erect  and  the  plants  which 
we  grow,  is  of  course  essential  to  our  very  existence.  It  is 
not  a  matter  of  the  greatest  economic  interest,  however,  because 
it  is  not  so  scarce  as  some  other  properties.  Rocky  or  desert 
land,  of  which  there  is  an  abundance,  furnishes  support  as  well 
as  fertile  land.  The  quality  of  extension,  that  is,  superficial 
area,  is  also  essential.  It  is  this  which  enables  us  to  catch  and 
utilize  the  sun's  rays,  the  rain,  and  the  dew.  It  is  this  which 
provides  room  for  plants  to  grow,  to  spread  their  roots  to  the 
soil  and  their  leaves  to  the  air.  It  is  this  which  furnishes  space 
for  the  erection  of  buildings  and  the  carrying  on  of  all  activi- 
ties. This  quality  of  extension,  however,  is  possessed  by  sterile 
as  well  as  by  fertile  land,  and  by  land  which  is  badly  located  as 
well  as  by  land  which  is  well  located. 

Economic  properties.  Location  may  also  be  said  to  be  a 
geometric  property  of  land.  It  is  a  matter  of  great  economic 
importance,  because  there  is  such  a  scarcity  of  land  in  the  best 
locations.  By  location  is  meant  proximity  and  convenience  of 
access  to  markets,  roads,  schools,  scenery,  and  various  other 
desirable  things.  Some  land  is  greatly  superior  to  other  land 

142 


LAND  143 

in  this  respect,  and  this  creates  a  great  difference  in  the  desir- 
ability of  different  lands.  Location  is  the  chief,  almost  the 
only  factor  in  determining  the  value  of  urban  land.  In  a 
place  where  multitudes  of  people  desire  to  live,  land  is  neces- 
sarily scarce,  but  the  scarcity  is  a  scarcity  of  land  well  located 
for  urban  purposes  ;  that  is,  for  business  or  for  the  dwellings 
of  those  who  have  to  live  within  reach  of  the  business  estab- 
lishments. Moreover,  the  differences  in  the  value  of  lands 
within  a  city  are  due  almost  wholly  to  differences  in  location. 
In  agricultural  communities  location  is  a  factor,  but  not  the 
only  nor  the  most  important  factor,  in  determining  land  values. 
Nearness  to  market  or  to  railroads,  the  character  of  the  wagon 
roads,  accessibility  to  schools  and  other  social  advantages,  count 
for  much  ;  but  the  character  of  the  soil  and  the  subsoil,  the 
climate,  the  moisture,  and  the  other  factors  which  determine 
plant  growth,  count  far  more.  All  these  factors  which  promote 
plant  growth  may  be  grouped  under  the  name  fertility.  In 
that  case  we  may  say  that  from  an  economic  point  of  view 
location  and  fertility  are  the  most  important  properties  of 
agricultural  land. 

Good  location  saves  transportation.  When  we  look  for  the 
reason  why  location  is  a  matter  of  such  importance,  we  must 
recall  the  fact  that  man's  chief  work,  on  the  physical  side,  is 
the  moving  of  materials.  It  is  this  which  requires  power ;  and 
power  is  costly,  whether  it  be  generated  in  the  human  body 
and  exercised  through  the  muscles,  or  whether  it  be  developed 
in  the  bodies  of  animals,  or  through  mechanical  agents.  One 
very  important  phase  of  the  work  of  moving  materials  is  that  of 
marketing  products.  The  nearer  a  body  of  land  is  to  a  market, 
and  the  better  the  means  of  transportation,  the  less  labor  and 
power  it  takes  to  get  its  products  to  market.  On  land  which  is 
well  located  with  respect  to  markets  it  is  therefore  possible  to 
utilize  labor  more  efficiently  than  on  land  which  is  badly,  located. 

It  is  also  costly  to  move  man  himself.  It  is  therefore  advan- 
tageous that  he  should  live  in  close  proximity  to  his  work. 


144          PRINCIPLES  OF  POLITICAL  ECONOMY 

If  he  lives  far  away,  the  cost  of  transportation  is  greater,  and 
the  labor  force  of  the  community  is  less  efficiently  applied,  than 
if  he  lives  close  by.  Even  though  the  trolley  fare  is  the  same 
for  a  long  as  for  a  short  distance,  transportation  costs  more 
over  the  long  distance.  In  the  first  place,  it  takes  a  longer  time 
and  the  passenger  loses  that  time.  In  the  second  place,  it  costs 
the  transportation  company  more,  and  that  extra  cost  must  ulti- 
mately reduce  the  total  productive  power  of  the  community. 
The  extra  labor  required  to  transport  passengers  a  longer  dis- 
tance might  otherwise  be  used  in  other  lines  of  production. 
However,  the  sheer  scarcity  of  land,  both  for  business  and  for 
residence  purposes,  forces  population  to  spread  and  makes  long- 
distance transportation  necessary,  however  costly  it  may  be. 

In  proportion  as  transportation  can  be  cheapened,  in  that 
proportion  will  questions  of  location  become  of  less  importance 
from  the  standpoint  of  production.  From  the  standpoint  of  con- 
sumption or  direct  enjoyment,  cheapened  transportation  would 
apparently  make  little  difference.  Certain  neighborhoods,  be- 
cause of  neighbors,  scenery,  fashion,  and  a  variety  of  reasons, 
would  still  be  preferred  to  others.  If  one  could  imagine  cost- 
less transportation,  such  as  is  pictured  in  the  Arabian  Nights 
by  the  story  of  the  magic  rug,  on  which  one  could  be  instantly 
transported  to  any  distance,  one  location  would  be  as  desirable 
for  production  as  another ;  that  is  to  say,  if  there  were  no  dif- 
ference between  two  pieces  of  land  in  fertility  or  in  anything 
else  except  location,  they  would  be  equally  desirable.  It  would 
cost  no  more  to  transport  products  to  market,  or  men  to  and 
from  their  work,  in  one  case  than  in  another.  So  far  as  loca- 
tion is  concerned  there  would  be  no  scarcity  of  land  until  all 
the  unoccupied  portions  of  the  earth  were  occupied  and  utilized. 
In  short,  such  a  perfect  system  of  transportation  would  vastly 
increase  our  available  supply  of  usable  land. 

While  it  is  obvious  that  no  such  instantaneous  and  costless 
system  of  transportation  will  ever  be  devised,  it  is  equally 
obvious  that  the  more  nearly  we  can  approach  that  system  the 


LAND  145 

more  land  we  shall  have  available  for  all  sorts  of  purposes.  It 
is  the  superiority  of  modern  as  compared  with  earlier  means 
of  transportation  which  makes  possible  those  vast  aggregations 
of  people  known  as  cities.  They  can  draw  their  supplies  from 
greater  distances  and  in  greater  abundance  than  would  be  pos- 
sible with  less  efficient  means  of  transportation.  Ancient  cities 
that  were  situated  on  navigable  rivers  or  on  the  seashore  had  the 
advantage  of  water  transportation,  which,  even  before  the  days 
of  steamships,  was  fairly  cheap  and  efficient.  Nonperishable 
products,  such  as  wheat,  could  then  and  can  still  be  transported 
long  distances  in  sailing  vessels  at  low  cost.  Consequently, 
where  water  transportation  was  possible,  cities  of  considerable 
size  grew  up  long  before  the  days  of  steam  railways.  But 
inland  cities,  such  as  many  of  those  which  dot  the  maps  of 
every  progressive  country,  would  have  been  an  impossibility. 

Access  to  food  supplies.  It  seems  to  be  a  general  rule,  apply- 
ing to  all  forms  of  life,  that  numbers  depend  upon  food  supply. 
Where  food  is  abundant,  numbers  may  be  large.  Since  food 
comes  ultimately  from  the  soil,  the  capacity  of  the  soil  to  pro- 
duce food  places  a  limit  upon  numbers.  One  of  two  things 
must,  of  course,  follow :  a  large  population  must  either  spread 
over  wide  areas  of  land  in  order  to  find  sufficient  food,  or  it 
must  transport  food  from  these  wide  areas  where  it  is  produced 
to  the  densely  populated  centers  where  the  people  live.  Certain 
birds  reverse  this  process  and  manage  to  live  a  part  of  the 
time  in  large  flocks  and  transport  themselves  to  and  from  their 
feeding  grounds.  If  they  are  strong  fliers,  as  were  the  wild 
pigeons  which  formerly  inhabited  this  continent,  they  may  feed 
over  large  areas  and  return  to  their  roosting  places  at  night. 
It  was  their  remarkable  powers  of  flight  which  enabled  such 
vast  numbers  to  roost  in  the  same  locality ;  otherwise  they 
would  have  been  compelled  to  break  up  into  smaller  flocks  in 
order  to  live  nearer  their  feeding  grounds.  The  same  law 
seems  to  apply  to  human  flocks.  If  we  were  not  able  to  trans- 
port food  and  other  supplies  such  long  distances,  our  large 


146          PRINCIPLES  OF  POLITICAL  ECONOMY 

cities  would  be  compelled  to  scatter  and  build  many  smaller 
cities,  or  else  live  as  scattered  families,  in  order  to  be  nearer 
the  sources  of  supply.  Even  with  our  present  means  of  trans- 
portation there  are  limits  beyond  which  it  does  not  seem  to 
be  advantageous  to  concentrate  our  population.  Consequently 
we  find  many  small  cities  and  towns  whose  people  live  by  the 
indoor  industries.  They  are  nearer  sources  of  supplies  of  various 
kinds,  besides  having  more  room  for  their  own  industries. 

Increasing  floor  space  by  erecting  tall  buildings.  The  neces- 
sity for  room  for  the  indoor  industries  can  be  supplied  in  part 
by  tall  buildings.  Floor  space  can  be  increased  by  as  many 
stories  as  can  be  built,  subtracting,  of  course,  the  space 
necessary  for  elevators,  stairways,  airshafts,  etc.  But  after 
a  very  moderate  height  is  reached,  the  cost  of  construction 
increases  more  than  in  proportion  to  the  added  floor  space. 
To  add  one  more  story  on  the  top  of  a  tall  building  requires 
stronger  walls  all  the  way  down,  and  also  a  better  foundation. 
Besides,  it  costs  more  to  carry  the  building  materials  to  the 
greater  height;  the  cost  of  elevator  service  to  the  top  floor 
is  somewhat  higher  than  for  lower  floors.  A  twenty-story 
building  is  of  a  very  moderate  height  in  some  of  our  large 
cities,  where  land  is  very  scarce ;  but  even  this  height  would 
be  absolutely  unprofitable  in  a  town  where  there  was  plenty  of 
room  on  the  ground. 

Streets.  The  traffic  needs  of  a  busy  population  also  make 
demands  upon  land  for  streets.  Much  the  same  methods  are 
used  to  economize  land  for  street  purposes  as  for  building 
purposes.  The  building  of  subways,  sub-subways,  elevated 
roads,  and  viaducts  is  a  familiar  method.  It  used  to  be  sug- 
gested in  a  jocular  way  that  a  road  through  the  air  would 
also  economize  land.  Flying  machines  may  eventually  trans- 
form that  joke  into  a  real  economy.  Superior  pavements  for 
the  support  of  larger  and  more  powerful  vehicles  will  also 
economize  road  space  somewhat,  by  permitting  more  traffic  to 
be  carried  on  over  a  street  of  given  width. 


LAND  147 

Economizing  agricultural  land.  These  methods  of  econo- 
mizing land  are  suited  to  urban  rather  than  to  rural  districts. 
Space  is  required  in  agriculture,  as  suggested  above,  for  the 
utilization  of  solar  energy,  soil,  and  moisture  in  plant  growth. 
"Two-story  farming,"  as  Professor  J.  Russell  Smith  calls  it, 
consists  in  growing  tree  crops  and  ground  crops  underneath 
the  trees.  Some  space  can  be  saved  in  these  ways,  where 
there  is  plenty  of  sunlight,  soil,  and  moisture,  but  not  a  great 
deal.  It  enables  the  plants  to  utilize  sunlight  a  little  more 
effectively,  perhaps,  because  the  low-growing  plants  can  use 
that  which  filters  through  the  foliage  of  the  trees ;  but  if  the 
trees  use  too  much  (that  is,  if  the  low-growing  plants  are 
shaded  too  much),  their  development  is  retarded.  There  may 
be  some  economy  of  soil  fertility  also  if  the  trees  send  their 
roots  deeper  than  the  smaller  plants.  In  that  case  the  two 
kinds  of  growth  do  not  compete  directly  for  soil  fertility. 
Where  an  abundance  of  artificial  fertilizer  can  be  used  and 
water  for  irrigation  is  plentiful,  an  adequate  supply  of  plant 
food  and  moisture  can  be  supplied  to  both  kinds  of  vegetation. 
In  this  case  the  limiting  factor  is  sunlight.  This  is  a  factor 
for  which  we  have  not  yet  found  a  good  substitute.  Therefore 
we  must  continue  to  spread  our  cultivation  over  wider  areas 
if  we  are  to  support  larger  populations. 

Intensive  farming.  "  Two-story  farming  "  is  only  one  phase 
of  intensive  agriculture,  which  may  be  defined  as  the  use  of 
large  quantities  of  labor  and  capital  in  the  cultivation  of  rela- 
tively small  areas  of  land  in  order  to  get  large  crops  per  unit 
of  land ;  that  is,  large  crops  per  acre.  As  pointed  out  in 
Chapter  XV,  extreme  efforts  to  increase  the  productivity  of  land 
tend  to  decrease  the  productivity  of  labor ;  that  is,  to  reduce 
the  product  per  unit  of  labor.  When  a  country  becomes  thickly 
populated,  however,  if  its  people  are  unwilling  to  migrate  to 
countries  where  land  is  abundant,  the  problem  of  economizing 
land  becomes  one  of  great  importance.  So  long  as  it  can 
find  markets  for  the  products  of  indoor  industries,  it  may, 


148          PRINCIPLES  OF  POLITICAL  ECONOMY 

bring  the  products  of  the  soil  from  less  densely  populated 
countries.  When  these  outside  markets  cease  to  expand,  and 
it  is  therefore  compelled  to  live  more  and  more  from  the 
products  of  its  own  soil,  it  must  perforce  get  more  and  more 
out  of  its  soil.  Intensive  agriculture  is  then  forced  upon  it. 
Yet,  as  a  matter  of  observed  fact,  intensive  agriculture  the 
world  over  is  associated  with  the  poverty  of  those  who  actually 
work  on  the  soil,  though  it  may  be  also  associated  with  the 
riches  of  those  who  own  the  soil. 

Intensive  farming  and  poverty.  This  impoverishment  of  the 
worker  on  the  soil  where  the  soil  is  intensively  cultivated  is 
not  absolutely  necessary  except  where  the  intensive  cultivation 
is  carried  to  extremes.  It  is  a  necessary  result,  however,  if 
the  attempt  is  made  to  force  a  larger  crop  from  the  soil  by  the 
mere  application  of  more  and  more  labor  to  each  acre  of  land. 
The  yield  is  found  not  to  increase  in  proportion  as  the  labor 
is  increased,  which  necessarily  means  a  smaller  product  per 
man.  But  if  more  capital  is  used,  as  well  as  more  labor, 
particularly  if  better  methods  of  cultivation  are  adopted  and 
carried  out  by  means  of  the  larger  use  of  capital,  increasing 
yields  per  acre  may  be  secured  for  a  time,  and  up  to  a  certain 
point,  without  any  diminution  of  yield  per  unit  of  labor.  By 
using  more  power  and  larger  tools  in  order  to  plow  deeper 
and  prepare  a  better  seed  bed,  a  given  amount  of  labor  may 
cultivate  the  same  acreage  of  land  as  before  and  yet  get  a 
larger  yield  per  acre.  This  would  also  give  a  larger  yield  per 
man.  Again,  by  cultivating  a  slightly  smaller  acreage  and 
cultivating  it  more  thoroughly  by  means  of  better  tools,  the 
same  product  per  man  may  be  secured  and  a  somewhat  larger 
population  may  be  supported  without  any  diminution  in  aver- 
age income.  But  experience  shows  that  wherever  even  this 
process  is  carried  too  far,  a  smaller  product  per  man,  and 
consequent  poverty,  will  be  the  result. 

A  seeming  exception  to  this  rule  (but  it  is  only  a  seeming  ex- 
ception) is  found  when  a  few  cultivators  turn  from  the  growing 


LAND 


149 


of  staple  crops  to  the  growing  of  high-priced  specialties.  Only 
a  few  can  do  this,  for  the  reason  that  the  market  is  very  limited. 
The  mass  of  the  farming  population  must  grow  the  crops 
which  feed  and  clothe  the  people.  Those  who  do  succeed 
in  this  field  may  manage  to  make  good  incomes  from  very 
small  plots  of  land.  This  does  not  prove  by  any  means  that 
the  growers  of  wheat  or  beef  could  do  likewise.  So  long  as 
consumers  demand  wheat  bread  and  beef  as  parts  of  a  steady 
diet,  they  must  draw  their  subsistence  from  considerable  areas, 
for  these  products  can  be  most  economically  produced  by  what 
are  commonly  known  as  extensive  methods  of  cultivation. 

Turning  to  heavy-yielding  crops.  If  people  would  change 
their  habits  of  consumption,  and  consume  products  which  could 
be  economically  produced  under  intensive  methods,  or  products 
which  are  capable  of  yielding  large  quantities  of  food  per  acre, 
a  great  deal  of  land  could  be  saved  ;  in  other  words,  a  much 
larger  population  could  be  supported  from  a  given  area. 

The  following  table  shows  the  estimated  power  of  an  acre 
of  land  under  good  cultivation,  but  not  the  most  intensive 
cultivation,  to  produce  food  of  different  kinds  : 


FOOD  VALUE 
PER  POUND 
IN  CALORIES1 

POUNDS 
PER  ACRE 
(GOOD  YIELD) 

CALORIES 
PER  ACRE 

RATIO  TO 
WHEAT  AS 
BASIS 
(PER  CENT) 

Entire  wheat  flour      .    .    . 

1660 

1,  800 

2,988,000 

100 

Native  beef  (as  purchased) 

1130 

200 

226,000 

7 

Mutton  (as  purchased)  .     . 

1275 

250 

3  i  8,7  5° 

1  1 

Whole  milk    

325 

4,OOO 

1,300,000 

43 

Corn  meal  (unbolted)     .    . 

1550 

3,600 

5,580,000 

1  86 

Oatmeal     

i860 

1,  8OO 

"?,  ^48,000 

I  12 

Rice  

16^0 

2.4OO 

•3,012,000 

I'll 

Rye  meal  as  flour  .... 

1630 

1,  800 

2,934,000 

08 

Beans     

i  cqo 

2.4OO 

3,816,000 

I2Q 

Potatoes     

•*2S 

24,OOO 

7,800,000 

260 

Sweet  potatoes  

480 

3O,OOO 

14,400  ooo 

482 

1  From  Bulletin  28,  United  States  Department  of  Agriculture,  Office  of 
Experiment  Stations.     Government  Printing  Office,  1896. 


150          PRINCIPLES  OF  POLITICAL  ECONOMY 

Of  course,  there  are  elements  of  food  value  other  than  the 
heat-producing  elements,  but  this  table  is  enough  to  indicate 
that  some  economy  of  land  could  be  effected  by  consuming 
other  and  more  heavy-yielding  crops  than  wheat  and  beef. 
Even  these  economies  of  land,  however,  might  be  gained  by 
a  less  economical  use  of  labor.  While  wheat  and  beef  require 
considerable  areas  of  land  for  their  most  economical  production, 
they  can  be  produced  with  comparatively  small  quantities  of 
labor  where  the  conditions  are  right.  On  our  western  wheat 
farms,  for  example,  where  powerful  machinery  can  be  used,  a 
small  number  of  men  can  grow  and  harvest  a  very  large 
acreage  of  wheat.  On  our  western  cattle  ranges  also  a  small 
number  of  men  can  care  for  large  numbers  of  cattle  pasturing 
over  very  wide  areas.  If  we  did  not  have  land  enough  for  these 
purposes,  and  had  to  support  a  growing  population  from  our 
own  soil,  potatoes,  sweet  potatoes,  corn,  beans,  and  milk,  and 
milk  products  in  the  form  of  butter  and  cheese,  would  support 
many  more  people  than  could  be  supported  on  wheat  and  beef. 

The  banana  and  the  date.  Certain  tropical  countries  have 
great  advantages  in  the  way  of  food  production  on  small  areas. 
Concerning  the  banana,  Humboldt  wrote  :  "  I  doubt  if  there 
exists  another  plant  on  the  globe,  which,  on  a  small  space  of 
ground,  can  produce  so  considerable  a  mass  of  nourishment.  .  .  . 
The  product  of  bananas  is  to  that  of  wheat  as  133:1,  to  that 
of  potatoes  as  44:1."  In  Arabia  and  northern  Africa  the 
date  is  very  prolific  and  in  favorable  locations  produces  large 
quantities  of  food.1 

Turning  to  the  indoor  industries.  It  is  not  likely  to  be 
repeated  too  often  that  the  favorite  method  of  economizing 
land  and  supporting  a  large  population  is  to  give  up  trying  to 
be  physically  self-supporting  and  try  to  become  commercially 
self-supporting.  By  being  physically  self-supporting  is  meant 
producing  from  our  own  soil  all  or  practically  all  that  we  need. 

1  Cf.  Buckle,  History  of  Civilization  in  England,  Chapter  XI.  London, 
1857-1861. 


LAND  1 5 1 

By  becoming  commercially  self-supporting  is  meant  bringing 
in  the  products  of  the  soil  from  other  countries,  selling  to 
those  countries  in  return  the  products  of  the  mines  and  the 
indoor  industries.  The  products  of  the  indoor  industries  may 
themselves  be  made  from  imported  raw  materials.  In  this 
case  we  bring  in  raw  materials,  work  them  up  into  finished 
products,  and  sell  them  again  to  outside  people,  living  our- 
selves upon  the  profits  of  the  transaction.  We  virtually  sell 
our  labor  to  other  nations. 

This  method  of  building  up  a  great  population  has  such 
vast  possibilities,  provided  we  are  so  situated  as  to  be  able  to 
do  it,  as  to  appeal  powerfully  to  the  imaginations  of  statesmen 
and  nation  builders.  If  outside  markets  fail,  then  we  must 
turn  to  the  development  of  our  own  soil,  for  in  that  case  we 
must  become  physically  self-supporting. 

The  pent-up  versus  the  expanding  type  of  civilization.  Even 
though  we  aim  to  become  physically  self-supporting,  we  have 
two  distinct  lines  of  development  open  to  us  :  one  is  to  develop 
an  oriental,  or  pent-up,  type  of  civilization ;  the  other  is  to 
develop  an  occidental,  or  expanding,  type  of  civilization.  By  an 
oriental,  or  pent-up,  type  of  civilization  is  meant  a  civilization 
in  which  we  try  to  live  on  our  existing  area  of  land,  and  to 
support  a  growing  population,  without  adding  to  our  productive 
area.  This  leads  to  a  gradually  increasing  intensity  of  cultiva- 
tion and  a  gradual  lowering  of  the  standard  of  living  of  those 
who  work  on  the  soil,  and  eventually  of  the  masses  of  the 
people.  By  an  occidental,  or  expanding,  type  of  civilization  is 
meant  a  civilization  in  which  the  effort  is  made  to  maintain  the 
standard  of  living  and  the  product  per  man  in  a  growing  popu- 
lation by  widening  our  cultivated  area  rather  than  by  cultivating 
the  original  area  more  and  more  intensively.  If  we  had  been 
developing  a  pent-up  civilization,  we  should  never  have  spread, 
say,  outside  of  the  original  thirteen  states,  but  should  have  tried 
to  support  our  increasing  numbers  by  cultivating  the  soil  more 
and  more  intensively.  Indeed,  we  should  probably  not  have  left 


152          PRINCIPLES  OF  POLITICAL  ECONOMY 

Europe  in  the  first  place,  unless  it  were  to  escape  persecution. 
We  have  preferred  to  expand  over  more  land  rather  than  to  try 
to  live  on  the  original  area,  whatever  that  original  area  may  have 
been.  It  is  difficult  to  see  where  this  tendency  will  lead  us,  but 
it  is  a  rather  striking  fact  that,  from  the  Greeks  down  to  the 
nations  of  the  present,  every  great  European  nation  has  been 
a  colonizing  nation.  Thus  people  have  preferred  to  go  where 
land  was  abundant  rather  than  to  stay  where  population  was 
dense.  Unless  we  change  our  habit  very  decidedly,  we  shall 
probably  continue  to  do  the  same  in  the  future ;  that  is,  we 
shall  try  to  maintain  our  standard  of  living.  When  this  cannot 
be  achieved  by  intensive  cultivation,  we  shall  swarm,  or  send 
out  colonists ;  that  is,  some  people  will  emigrate.  The  only 
alternative  would  be  the  maintenance  of  a  stationary  population 
through  birth  control. 

The  table  on  the  following  page  shows,  roughly,  the  area  of 
land  which  it  takes  to  produce,  under  fairly  good  agriculture, 
the  food  of  a  soldier  for  a  year. 

This  does  not  take  into  consideration  the  land  necessary  to 
clothe  him  or  to  feed  the  horses  which  are  used  to  cultivate 
the  land.  If  we  assume  that  an  average  family  of  five  persons 
will  consume  as  much  as  three  soldiers,  we  shall  conclude  that  it 
takes  nine  acres  to  produce  the  food  for  a  family.  Under  ordi- 
nary conditions  it  takes  approximately  five  acres  to  produce  the 
feed  for  a  horse.  According  to  the  United  States  Census,  in  the 
great  farming  area  of  the  upper  Mississippi  Valley  there  is  one 
farm  horse  for  every  thirteen  acres  under  cultivation.  If,  to  be 
fairly  liberal,  one  horse  is  sufficient  to  cultivate  on  the  average 
fourteen  acres,  we  might  conclude  that  one  horse  could  furnish 
the  power  necessary  to  cultivate  enough  land  to  grow  the  food 
for  one  family  (nine  acres)  and  for  himself  besides  (five  acres). 

The  yields  assumed  in  the  above  table  are  not  unusually 
large,  being  about  the  same  as  those  in  England  and  other 
well-cultivated  countries,  but  they  are  about  twice  the  average 
yields  in  this  and  other  new  countries. 


LAND  153 

STANDARD  RATION  FOR  UNITED  STATES  ARMY 


ARTICLES  CONSUMED1 

OUNCES1 
ETC. 

PER  DAY 

POUNDS  PER 
YEAR 

GOOD  YIELD 
IN  POUNDS 
PER  ACRE 

ACRES  HEQUIRED 
TO  PRODUCE 
YEARLY  RATION 

Beef,  fresh  

20. 

4^6.2  ? 

"'OO 

2.28 

Flour   

18 

4106 

I  2OO 

."?4 

Baking  powder    

.08 

Beans       

2.4 

cc 

*>  400 

.022 

Potatoes       

20. 

4^6.21; 

I2,OOO 

.0^8 

Prunes     

1.28 

2Q.2 

"2.OOO 

.OOQ 

Coffee,  roasted  and  ground 
Sugar  

1.  12 
•3.2 

25-55 
7-3. 

4,800 

2,500 

.OO5 
.O2Q 

Milk,  evaporated,  unsweetened 
Vinegar   

•5 
.16  gill 

"•5 

14.6 

625 
•5.OOO 

.018 
.OO4 

Salt      

.64  oz 

Pepper,  black  

.04 

Cinnamon    

.014 

Lard     

64 

14  6 

100 

.048 

Butter      

.c 

II.  C 

7  >\ 

.1  ">"} 

Sirup    

.-12  Sfill 

2Q  2 

2,500 

.OI 

Flavoring  extract,  lemon     .    . 

.014 

Total 

2.956 

(Roughly, 
3  acres) 

One  very  important  part  of  the  problem  of  economizing  land 
is  that  of  preserving  and  improving  its  present  fertility.  This 
is  to  be  done  mainly  by  careful  management  of  the  soil.  Crop 
rotation,  a  proper  balance  between  plant  growing  and  animal 
husbandry  in  order  to  supply  natural  manure,  and  an  increased 
use  of  chemical  fertilizers  are  the  main  parts  of  a  policy  of  soil 
conservation.  How  important  an  item  natural  manure  is  in  our 
national  economy  may  be  shown  by  the  following  facts  :  It  has 
been  conservatively  estimated2  that  the  value  of  the  animal 
manure  of  the  country  exceeds  two  billion  dollars  ($2,225,700). 
This  is  greater  than  the  combined  value  of  all  the  mineral 
output  and  the  entire  timber  cut  of  the  country  at  the  time  the 

1  Cf.  "  United  States  Army  Regulations,  1913"  (corrected  to  April  15, 1917), 
paragraph  1205,  p.  240.    Government  Printing  Office,  Washington,  1917. 

2  farmers'  Bulletin  192,  p.  5,  United  States  Department  of  Agriculture. 


154          PRINCIPLES  OF  POLITICAL  ECONOMY 

estimate  was  made.  If  one  third  of  this  is  wasted,  it  amounts 
to  a  sum  much  greater  than  the  value  of  the  entire  timber  cut 
of  the  country.  Clearly  the  conservation  of  our  animal  manure 
is  one  of  our  greatest  conservation  problems.1  The  increasing 
use  of  chemical  fertilizers,  however,  is  necessary  if  we  are  to 
make  increasing  drafts  upon  the  soil  in  order  to  feed  our 
increasing  population. 

1  "  The  Organization  of  a  Rural  Community,"  Yearbook  of  the  United  States 
Department  of  Agriculture,  1914. 


CHAPTER  XIII 

CAPITAL 

What  is  capital?  Capital  has  come  to  play  a  very  important 
part  in  modern  industry.  This  increase  in  importance  has  been 
so  great  as  to  lead  to  the  impression  that  capital  has  come  into 
existence  only  in  recent  times.  That  which  is  essentially  capital 
has  been  in  existence  as  long  as  tools  have  been  in  existence, 
but  it  has  taken  on  a  new  and  very  distinct  importance  since 
the  rise  of  machine  production. 

As  a  factor  in  the  modern  economic  system,  capital  may  be 
defined  as  wealth,  other  than  land,  which  is  used  by  its  owner 
to  secure  an  income  rather  than  for  direct  enjoyment.  Land 
and  other  natural  agents  are  usually  treated  as  though  they 
were  in  a  class  by  themselves,  and  are  carefully  distinguished 
from  the  products  of  human  industry  and  enterprise.  These 
products  of  man's  effort  are  subdivided,  according  to  the  uses 
to  which  they  are  put,  into  producers'  goods  and  consumers' 
goods.  Producers'  goods  include  all  tools,  machines,  buildings, 
appliances,  and  other  forms  of  equipment  which  are  used  for 
the  production  of  other  goods  ;  while  consumers'  goods,  on  the 
other  hand,  include  only  such  goods  as  are  used  for  direct  en- 
joyment rather  than  for  the  purpose  of  producing  other  goods. 
Capital  includes  all  producers'  goods  and  some  consumers' 
goods.  It  includes  all  producers'  goods,  because  they  are  used 
for  the  purpose  of  increasing  the  owner's  income.  It  also  in- 
cludes some  consumers'  goods,  because  some  of  these  are  used 
by  their  owners  for  the  purpose  'of  securing  an  income.  A 
pleasure  automobile,  for  example,  which  is  let  for  hire  is  a  con- 
sumers' good  from  the  standpoint  of  society ;  that  is,  it  is  not 
used  to  produce  other  goods,  but  is  used  for  direct  enjoyment 


156          PRINCIPLES  OF  POLITICAL  ECONOMY 

and  satisfaction.  From  the  standpoint  of  its  owner,  however, 
it  is  used  to  get  an  income.  He  gets  no  consumer's  satisfaction 
out  of  it,  but  he  gets  paid  for  its  use,  and  this  payment  is  a 
part  of  his  income.  In  short,  he  keeps  it  for  the  sake  of  the 
income  which  it  brings  him.  A  dwelling  house  is  likewise  a 
consumers'  good  from  the  standpoint  of  society ;  but  if  it  is 
rented,  it  is  capital  to  its  owner.  He  gets  no  direct  satisfaction 
out  of  it.  He  gets  money  for  its  use.  This  money  is  a  part 
of  his  income. 

Social  capital  and  private  capital.  Some  writers  have  accord- 
ingly spoken  of  two  kinds  of  capital :  first,  social,  or  productive, 
capital ;  and,  second,  private,  or  acquisitive,  capital.  Social,  or 
productive,  capital  is  identical  with  producers'  goods ;  private, 
or  acquisitive,  capital  includes  such  consumers'  goods  as  are  let, 
rented,  or  hired  by  their  owners  to  other  people.  Consumers' 
goods,  of  course,  are  just  as  useful  as  producers'  goods,  but 
they  are  used  for  different  purposes.  Therefore  private,  or  ac- 
quisitive, capital  is  just  as  useful  as  social,  or  productive,  capital. 
The  owner  is  just  as  well  entitled  to  his  income  in  one  case  as 
in  the  other.  Capital,  then,  is  goods ;  but  it  is  that  portion  of 
the  produced  goods  in  the  possession  of  society  which  is  used 
by  its  owners  for  the  purpose  of  securing  income  rather  than 
for  the  purpose  of  direct  enjoyment.  It  is  used  by  its  possessors, 
however,  as  distinct  from  its  owners,  either  for  the  production 
of  other  goods  or  for  direct  enjoyment.  The  possessor  of  a 
rented  shop  is  using  the  shop  for  productive  purposes ;  the 
possessor  of  a  rented  dwelling  house  is  using  it  for  purposes  of 
direct  enjoyment. 

Capital  a  class  of  goods,  not  a  fund  of  value.  Capital  is 
sometimes  conceived  of  not  as  a  class  of  goods'  but  as  a  fund 
of  value.  There  are  two  reasons  which  lead  naturally  to  this 
way  of  thinking,  but  there  is  danger  that  this  way  of  thinking 
may  lead  us  into  serious  error.  In  the  first  place,  however 
capital  may  have  originated  historically,  one  nowadays  usually 
comes  into  possession  of  it  first  in  the  form  of  money ;  that  is, 


CAPITAL  157 

the  owner  of  the  automobile,  the  dwelling  house,  the  shop,  the 
factory,  usually  spent  money  in  order  to  get  it.  The  possession 
of  money  gives  one  the  opportunity  to  come  into  possession  of 
these  other  forms  of  capital.  The  purchase  of  these  various 
forms  of  capital  is  usually  called  investing  capital.  After  one 
has  purchased  a  shop  or  a  factory,  a  house  which  one  intends 
to  rent  to  someone  else,  or  any  other  income-bearing  property, 
one  is  said  to  have  invested  his  capital.  That  sounds  as  though 
the  money  were  the  capital  which  one  had  invested.  That  is 
not  strictly  true.  One  has  merely  exchanged  one  form  of  capital 
for  another. 

Money  one  form,  but  only  one  form,  of  social  capital.  The 
last  statement  implies  that  money  is  a  form  of  capital.  This 
has  sometimes  been  disputed.  To  be  sure,  money  is  not  the 
only  form  of  capital,  but  it  is  one  form.  While  it  is  not  correct 
to  say  that  capital  is  money,  it  is  correct  to  say  that  money  is 
capital.  A  work  horse  is  likewise  a  form  of  capital,  but  it  is 
not  proper  to  say  that  capital  is  a  work  horse.  There  is  this 
difference,  however,  between  money  and  work  horses.  Very 
few  capitalists  ever  find  that  the  greater  part  of  their  capital  is 
in  the  form  of  work  horses.  Almost  every  capitalist  nowadays 
finds,  at  one  time  or  another,  that  a  large  part  of  his  capital  is 
in  the  form  of  money  or  has  passed  through  that  form.  He 
is  continually  buying  and  selling,  receiving  money  and  paying 
out  money,  and  is  not  receiving  work  horses  and  paying  out 
work  horses. 

Money  may  be  said  to  be  a  tool  or  a  means  by  which  the 
community  can  do  more  work  than  it  would  be  able  to  do  with- 
out money.  It  is  therefore,  like  other  tools,  a  form  of  capital. 
It  is  also  a  very  important  form  of  capital,  one  which  is  con- 
tinually coming  into  the  possession  of  every  capitalist  and  be- 
ing paid  out  again.  This  leads  naturally,  as  suggested  above, 
to  the  inference  that  capital  consists  of  a  fund  of  value,  or  of 
value  expressed  in  terms  of  money.  While  there  is  no  objec- 
tion to  continuing  to  speak  of  investing  capital,  when  one  is 


158          PRINCIPLES  OF  POLITICAL  ECONOMY 

only  exchanging  money  for  other  forms  of  capital,  still  one 
must  be  on  one's  guard  against  assuming  that  capital  is  any- 
thing else  than  goods.  It  is  well  to  remember  also  that  stocks, 
bonds,  mortgages,  etc.  are  not  capital,  but  only  evidences  of 
ownership  of  capital.  The  shares  of  the  stock  of  a  railroad 
company,  for  example,  are  not  themselves  capital ;  they  are 
only  evidences  of  ownership  in  the  railroad  itself,  which  is  the 
real  capital. 

Another  reason  which  leads  naturally  to  thinking  of  capital 
as  a  fund  of  value  is  found  in  the  fact  that  capital,  like  all 
wealth,  is  measured  in  terms  of  value  and  its  quantities  ex- 
pressed in  terms  of  money.  There  is  no  good  way  of  saying 
how  much  capital  there  is  in  any  community  or  in  the  possession 
of  any  individual  except  by  saying  it  in  terms  of  money.  If 
any  capitalist  were  asked  how  much  capital  he  possessed,  and 
he  were  to  answer  in  terms  of  tons,  or  cubic  feet,  or  yards,  or 
any  other  unit  of  physical  measurement,  he  would  not  convey 
any  clear  or  definite  idea.  Therefore,  if  you  ask  any  business 
man  to  state  how  much  capital  he  uses  in  his  business,  he  can 
only  answer  you  intelligently  by  saying  so  many  dollars  or  so 
many  dollars'  worth.  This  is  a  mere  quantitative  expression. 
If,  however,  you  were  to  ask  him  in  what  his  capital  really  con- 
sists, he  could  only  answer  you  intelligently  by  giving  you  an 
inventory  of  the  various  goods  which  make  up  his  fund  of 
capital.  The  only  exception  to  this  case  would  be  the  money 
lender,  whose  capital  consists  solely  of  money. 

Pure  capital  and  capital  goods ;  pure  weight  and  weighty 
objects.  One  may,  however,  reject  the  idea  that  capital  is  money 
and  still  persist  in  the  idea  that  it  is  a  fund  of  value.  The  dis- 
tinction has  sometimes  been  made  between  pure  capital  and 
capital  goods,  pure  capital  being  a  fund  of  value  embodied  in 
the  goods,  and  capital  goods  being  the  things  themselves  in 
which  that  fund  of  value  is  embodied.  The  value  of  the 
goods  is  not  capital  any  more  than  the  weight  of  an  object 
is  the  object  itself.  As  stated  above,  value  is  the  attribute 


CAPITAL  1 59 

which  we  use  in  trying  to  arrive  at  a  quantitative  conception 
of  the  real  goods.  It  is  the  only  attribute  which  they  all  possess 
in  common  and  which  at  the  same  time  indicates  their  ability 
to  serve  the  owner's  needs.  The  value,  however,  is  only  a 
symptom  of  that  ability,  and  not  a  cause  of  that  ability. 

The  function  of  productive  capital  is  to  aid  in  production. 
Except  in  the  case  of  money  it  is  not  the  value  of  the  goods 
which  enables  them  to  do  their  work.  The  value  is  only  a 
symptom  of  the  fact  that  they  are  doing  that  work.  A  pro- 
ducers' good  which  ceased  to  aid  in  production  would  lose  its 
value  ;  a  producers'  good  which  continued  to  be  a  real  aid 
in  production  would  retain  its  value.  The  value  would  be  the 
shadow  of  the  real  thing  and  not  the  substance.  Land  also 
has  value  if  it  is  productive.  But  it  is  not  the  value  which 
makes  it  productive ;  it  is  its  productivity  which  makes  it  valu- 
able. In  this  respect  capital  and  land  are  similar.  In  the  case 
of  that  special  kind  of  capital  known  as  money,  and  in  this 
case  alone,  its  usefulness,  its  ability  to  function,  depends  upon 
value  ;  in  every  other  case  its  value  depends  upon  its  usefulness 
or  its  ability  to  function. 

Capital  the  result  of  working  and  waiting.  The  next  ques- 
tion to  arise  is,  How  does  capital  come  into  existence  ?  If  it  con- 
sists of  tools,  buildings,  machines,  equipment,  etc.,  it  is  rather 
obvious  that  they  come  into  existence  because  labor  is  expended 
in  producing  them.  But  this  does  not  tell  the  whole  story.  In 
order  that  any  community  may  come  into  possession  of  a  larger 
stock  of  tools  and  equipment,  it  must,  temporarily  at  any  rate, 
divert  its  labor  force  from  the  production  of  consumers'  goods 
into  the  production  of  these  producers'  goods.  Whether  it  be 
a  communistic  society  or  an  individualistic  society,  this  physical 
fact  remains  the  same.  In  a  communistic  society,  if  the  stock 
of  capital  goods  is  to  be  increased,  some  labor  must  be  put  to 
work  making  tools,  machines,  buildings,  equipment,  etc.,  and 
just  that  much  less  labor  will  be  available  during  that  time  for 
the  production  of  consumers'  goods.  During  this  period  the 


i6o       -  PRINCIPLES  OF  POLITICAL  ECONOMY 

community  as  a  whole  will  have  fewer  consumers'  goods  than  it 
otherwise  might  have  had.  Of  course,  the  expectation  is  that 
the  tools  and  equipment,  after  they  are  produced  and  put  to 
use,  will  again  add  to  the  total  production.  This,  however,  in- 
volves a  certain  amount  of  postponement  of  consumption.  The 
community  as  a  whole  decides  that  it  will  have  fewer  con- 
sumers' goods  in  the  present  or  immediate  future  in  order  that 
it  may  have  more  in  the  distant  future.  There  is  no  possibility 
of  evading  this  physical  necessity. 

In  an  individualistic  society,  however,  though  the  same  phys- 
ical necessity  exists,  the  process  is  slightly  different.  Any  indi- 
vidual may  decide  that  he  will  consume  a  little  less  in  the 
present  or  the  immediate  future  in  order  that  he  may  have  a 
little  more  to  consume  in  the  distant  future.  The  way  he  does 
this  is  to  save  and  invest,  or  else  to  turn  aside,  as  may  have 
been  done  in  very  simple  states  of  society,  from  the  work  of 
gathering  consumers'  goods  in  order  to  apply  himself  to  the 
work  of  making  tools. 

Making  tools  rather  than  consumers'  goods.  A  primitive 
fisherman  has  frequently  been  used  as  an  illustration  of  this 
simple  process.  He  has  been  in  the  habit  of  catching  fish 
with  very  simple  tackle,  but  he  sees  an  opportunity  of  increas- 
ing his  catch  if  he  can  only  get  some  kind  of  boat,  so  he 
decides  to  spend  a  part  of  the  time  each  day  in  making  one. 
By  this  combination  of  frugality  and  industry  he  eventually 
comes  into  possession  of  a  boat  which  thereafter  adds  to  his 
income  and  more  than  compensates  him  for  the  frugality  which 
he  practiced  during  the  period  in  which  the  boat  was  building. 
This  case  is  doubtless  real  enough  to  serve  as  an  illustration 
of  the  essential  process  of  increasing  the  stock  of  capital. 

It  has  not  been  many  generations  since  farmers  used  very 
crude  and  simple  implements,  some  of  which  they  could  make 
for  themselves.  The  farmer  who  made  his  own  plow  was 
depriving  himself  of  the  opportunity  for  amusement,  which 
is  a  kind  of  consumption,  or  was  reducing  somewhat  his 


CAPITAL  161 

consumption  of  material  goods  during  the  period  when  the 
plow  was  being  made.  After  it  was  finished,  it  assisted  him  in 
producing  subsistence,  and  added  to  his  income  available  for 
consumption.  This  is  in  all  essential  particulars  similar  to  the 
case  of  the  primitive  fisherman.  A  little  later,  however,  the 
farmer,  instead  of  making  his  own  plow,  hired  a  blacksmith 
to  make  it,  paying  the  blacksmith  money  for  his  work.  Here 
we  have  the  same  combination  of  labor  and  frugality  as  in 
the  other  cases,  the  difference  being  that  in  the  making  of  the 
plow  the  blacksmith  does  the  laboring  and  the  farmer  exercises 
the  frugality.  With  the  money  which  he  paid  for  the  plow  he 
could  have  bought  consumers'  goods  and  had  immediate 
enjoyment.  He  postponed  that  enjoyment  when  he  paid  the 
money  to  the  blacksmith  and  received  the  plow.  In  the  then 
distant  future,  however,  the  plow  added  to  his  income  and 
enabled  him  to  make  up  for  the  loss  of  opportunity  for  imme- 
diate consumption,  and  thus  compensated  him  for  the  post- 
ponement which  he  underwent  when  he  purchased  the  plow. 
The  modern  farmer,  however,  instead  of  hiring  the  black- 
smith to  make  the  plow,  usually  buys  his  plow  ready  made.  So 
far  as  he  is  concerned,  the  act  of  frugality  is  the  same  as  though 
he  deliberately  hired  the  blacksmith  to  make  it.  He  surrenders 
a  certain  amount  of  ready  cash  with  which  he  might  have 
bought  consumers'  goods ;  he  receives  the  plow,  which  for  a 
period  of  years  will  add  to  his  income  and  therefore  compensate 
him.  In  the  making  of  the  plow,  however,  there  were  other 
tools  used,  as  well  as  labor.  Those  other  tools  had  been  made 
in  much  the  same  way  as  the  plow.  Someone  had  invested 
money  in  them  and  then  hired  other  labor  to  use  those  tools  in 
the  making  of  the  plow.  It  has  become,  therefore,  a  very  compli- 
cated process ;  but  anyone  who  will  analyze  the  process  will 
find  always  the  same  two  factors  involved  :  namely,  waiting 
and  working,  —  the  postponement  of  consumption,  on  the  one 
hand,  and  labor,  on  the  other.  No  capital  can  ever  come  into 
existence  without  this  combination.  It  is  merely  obscured  by  the 


1 62          PRINCIPLES  OF  POLITICAL  ECONOMY 

intricacies  of  the  modern  industrial  process,  and  it  requires  a 
little  more  intelligence  and  study  to  see  clearly  where  and  how 
the  frugality  and  the  labor  are  combined. 

Separation  of  the  functions  of  working  and  waiting.  In  the 
highly  complicated  industrial  system  of  the  present,  with  its 
increase  of  specialization,  the  two  functions  of  waiting  and 
working  are  generally  performed  by  different  persons  or  classes 
of  persons.  This  has  given  rise  to  some  of  the  most  intricate 
and  most  difficult  of  our  social  problems.  In  a  simpler  state,  in 
which  the  same  individual  exercised  both  functions,  no  social 
or  class  antagonisms  were  developed.  Even  in  the  intermediate 
stage,  when  the  farmer  bought  his  plow  from  the  blacksmith 
and  then  used  it  himself,  and  the  blacksmith  bought  his  own 
tools  and  used  them  himself,  we  find  both  functions  performed 
by  the  same  individuals.  Class  antagonisms  could  hardly  develop 
under  these  conditions.  But  when,  as  in  the  modern  industrial 
system,  the  capitalist  lives  mainly  from  the  income  of  his  capi- 
tal, and  the  laborer  mainly  from  the  wages  of  labor  (in  other 
words,  when  the  two  functions  are  sharply  separated),  class 
feeling  and  class  antagonism  have  developed.  It  has  come 
about  in  our  urban  industries  that  the  average  person  who  per- 
forms manual  labor  receives  his  wages  in  weekly  installments 
and  spends  them  mainly  for  consumers'  goods,  whereas  the 
very  tools  with  which  he  works  are  owned  by  other  men  who 
have  specialized  in  the  function  of  investing  their  money  in 
capital ;  that  is,  in  tools  and  equipment. 

Separation  of  the  function  of  the  laborer  and  the  capitalist. 
Capital  has  existed,  of  course,  as  long  as  tools  and  equipment 
have  existed,  but  this  separation  of  the  two  functions,  that  of 
the  laborer  and  that  of  the  capitalist,  has  become  general  only 
since  the  rise  of  machine  production.  Before  that  time  the 
function  of  the  capitalist  was  not  important  enough  to  create 
an  opportunity  for  many  men  to  live  exclusively  by  the  per- 
formance of  this  function.  Not  enough  capital  was  needed 
in  the  primitive  forms  of  industry  which  preceded  the  present, 


CAPITAL  163 

to  enable  a  large  number  of  men  to  live  on  its  earnings.  It 
is  this  fact  which  is  probably  meant  when  it  is  erroneously 
stated  that  capital  in  the  modern  sense  came  into  existence 
with  the  rise  of  machinery.  Capital  in  the  modern  sense  does 
not  differ  from  capital  in  the  former  or  capital  in  the  ancient 
sense ;  it  differs  only  in  the  sense  that  there  is  more  of  it  and 
more  needed.  This  combination  of  facts  —  the  fact  that  there 
is  more  needed  than  ever  before  and  that  there  is  more  of  it 
supplied  than  ever  before  —  has  created  what  we  call  the 
capitalist  class  in  modern  industry,  and  that  is  a  matter  of  the 
very  greatest  importance. 

Coordinating  labor  which  is  performed  at  different  times.  In 
a  somewhat  special  but  very  important  sense  we  may  say  that 
the  function  of  capital  is  to  aid  in  production  by  coordinating 
labor  which  is  performed  at  different  times.  In  the  chapter 
on  The  Division  of  Labor  it  was  pointed  out  that  there  are 
two  distinct  forms  of  the  division  of  labor ;  namely,  the  con- 
temporaneous and  the  successive.  Under  our  modern  indus- 
trial system  the  successive  division  of  labor  has  been  greatly 
lengthened  out.  In  some  cases  many  years  elapse  between  the 
beginning  of  a  process  and  the  final  completion  of  the  pro- 
duction of  a  consumable  article.  There  is  a  striking  analogy 
between  the  lengthening  out  of  the  successive  division  of 
labor  and  the  widening  out  of  the  contemporaneous  division 
of  labor.  The  latter  has  been  brought  about  through  im- 
proved means  of  communication  and  transportation.  It  is 
literally  true  at  the  present  time  that  thousands  of  miles  or 
even  half  the  earth's  circumference  may  separate  men  who 
are  working  for  the  production  of  the  same  article.  The 
coordination  of  labor  performed  at  such  widely  separated  points 
of  space  is  one  of  the  most  important  and  striking  aspects 
of  the  modern  industrial  system.  It  is,  however,  no  more 
important  or  striking  than  the  similar  coordination  which  has 
taken  place  between  labor  performed  at  widely  separated  points 
of  time. 


1 64          PRINCIPLES  OF  POLITICAL  ECONOMY 

There  are  various  ways  in  which  this  coordination  of  labor 
performed  at  different  times  may  be  presented  to  the  mind. 
In  a  primitive  state  of  industry  each  unit  of  labor  was  per- 
formed by  men  working  with  few  and  simple  tools.  The  tools 
may  be  said  to  represent  labor  performed  in  previous  times. 
When  the  worker  uses  tools,  his  work  in  the  present  time  is 
coordinated  with  the  work  of  the  man  who  made  the  tools. 
But  since  the  tools  were  very  few  and  simple,  it  would  be 
correct  to  say  that  a  given  unit  of  present  labor  is  being 
coordinated  with  a  very  small  amount  of  past  labor.  Under 
modern  conditions  the  average  laborer  is  using  more  tools,  as 
well  as  larger  and  more  complicated  tools,  than  were  used  by 
the  primitive  laborer.  These  large,  and  complicated  tools,  like 
the  primitive  tools,  represent  labor  performed  at  a  previous 
time.  The  labor  of  the  workmen  using  them  is  literally  being 
coordinated  with  the  labor  of  the  men  who  made  the  tools. 
Since  the  tools  are  so  numerous,  large,  and  complicated,  it  is 
correct  to  say  that  a  given  unit  of  present  labor  is  being 
coordinated  with  a  large  amount  of  past  labor. 

One  of  the  fundamental  changes  which  have  come  about  as 
a  result  of  the  modern  system  of  machine  production  is  that 
of  coordinating  a  given  quantity  of  present  labor  with  a  much 
larger  amount  of  past  labor  than  was  the  case  under  simpler 
conditions.  That  is  to  say,  in  a  simple  state  of  industry  a  given 
quantity  of  present  labor  would  work  in  coordination  with  a 
small  amount  of  past  labor.  At  the  present  time,  however, 
a  given  quantity  of  present  labor  is  found  to  be  working  in 
coordination  with  a  large  quantity  of  past  labor. 

The  coordination  of  labor  performed  at  different  points  in 
space  does  not  take  place  of  its  own  accord.  It  is  done 
through  agencies  of  transportation  and  communication.  Simi- 
larly, the  coordination  of  labor  performed  at  different  points  of 
time  does  not  take  place  of  itself;  it  takes  place  because 
of  the  willingness  of  men  to  wait,  to  spend  their  money  for 
producers'  goods  rather  than  for  consumers'  goods.  If  no  one 


CAPITAL  165 

were  willing  to  wait,  if  no  one  were  willing  to  postpone  con- 
sumption, if  everyone  insisted  on  living  from  hand  to  mouth 
as  the  spendthrift  does,  there  could  be  no  effective  coordination 
of  labor  performed  at  different  times. 

Lengthening  the  process  of  production.  In  order  that  there 
may  be  tools,  mines  must  be  opened  and  ore  extracted.  No 
one  wants  ore  for  its  own  sake ;  it  is  desired  because  it  is  a 
means  of  getting  something  in  the  distant  future  which  will 
be  desirable  for  its  own  sake.  Ore  must  therefore  be  smelted 
and  purified  into  iron  and  steel.  Again,  no  one  wants  iron 
and  steel  for  their  own  sakes,  but  solely  because  in  the  distant 
future  these  commodities  will  be  the  means  of  getting  things 
that  are  desirable  in  themselves.  Again,  iron  and  steel  must  be 
made  into  tools.  But  no  one  wants  tools  for  their  own  sakes. 
Tools  are  wanted  only  as  they  will  help  to  produce  things 
desirable  for  their  own  sakes.  It  is  this  constant  looking 
ahead  and  taking  thought  for  the  future,  accompanied  by  the 
postponing  of  present  consumption  in  favor  of  future  consump- 
tion, that  makes  possible  the  coordination  of  labor  performed 
at  different  times. 

Combination  of  factors.  Something  more  than  frugality, 
thrift,  and  foresight  are  necessary,  however.  Without  mechan- 
ical ingenuity,  however  frugal,  thrifty,  and  forethoughtful  a 
person  might  be,  he  would  find  it  difficult  to  exercise  these 
qualities  profitably.  Unless  someone  were  able  to  invent 
superior  methods  of  production  which  required  the  exercise  of 
those  qualities,  they  would  be  of  comparatively  little  economic 
advantage  to  those  who  possess  them. 

Here  we  have  an  example"  of  a  class  of  cases  which  con- 
tinually perplex  the  amateur  student  of  economics.  There  are 
cases  where  two  or  more  factors  are  absolutely  necessary  to 
get  a  given  result.  Fundamentally  the  problem  is  no  more 
obscure  than  that  involved  in  the  formula  2  x  3  =  6.  The 
students  will  agree  that  2  is  just  as  essential  as  3,  and  3  as 
essential  as  2,  in  getting  6.  Other  problems  of  a  similar  kind 


1 66          PRINCIPLES  OF  POLITICAL  ECONOMY 

are  found  in  every  field  of  science  as  well  as  in  arithmetic. 
Oxygen  and  hydrogen  are  equally  necessary  to  the  formation 
of  water ;  air  and  gasoline  must  be  mixed  in  the  carburetor  in 
order  that  there  may  be  an  explosion  in  the  gasoline  engine.  One 
is  as  essential  as  the  other.  The  upper  and  the  nether  millstone 
must  work  together  in  the  old-fashioned  mill  to  grind  wheat. 
Two  sets  of  rollers  are  necessary  in  the  modern  flour  mill. 

In  the  higher  realms  of  economics  we  find  numerous  exam- 
ples of  the  same  type  of  problem.  Forethought  and  inventive- 
ness are  examples  of  mental  qualities  which  are  combined  to 
secure  mechanical  progress.  However  inventive  men  may  be  in 
contriving  mechanical  improvements,  unless  someone  is  willing 
to  perform  labor  long  in  advance  of  the  consumption  of  the 
products  of  these  mechanical  improvements,  or  pay  someone 
else  for  performing  that  labor,  all  these  mechanical  contrivances 
will  remain  either  in  the  brains  of  the  inventors  or  in  museums. 

When  one  has  spent  his  money  for  iron  ore,  or  for  tools  of 
any  kind,  one  has  become  a  capitalist.  He  has  bought  some- 
thing of  no  immediate  use  to  him  as  a  consumer,  but  something 
which  is  a  means  by  which  in  the  future  he  may  get  consumers' 
goods.  Because  there  are,  in  any  community,  men  who  are  will- 
ing to  do  this,  there  is  a  market  for  the  genius  of  the  inventor. 
Similarly,  because  inventors  will  devise  mechanical  appliances 
and  improvements,  there  is  opportunity  for  the  investor  to 
become  a  capitalist,  —  a  buyer  of  tools  and  contrivances. 

These  two  functions,  that  of  the  inventor  and  that  of  the  in- 
vestor, are  absolutely  necessary,  whatever  the  type  of  social  organ- 
ization may  be.  Even  in  a  communistic  society  the  work  of  the 
inventor  amounts  to  nothing  unless  the  society  as  a  whole 
undertakes  what,  in  the  present  order  of  society,  the  individual 
capitalist  undertakes ;  namely,  to  set  men  to  work  at  making 
tools,  and  to  pay  them  wages  while  they  are  about  it.  One  im- 
portant difference  between  socialism  and  individualism  is  this: 
socialism  proposes  that  society  as  a  whole  shall  do  precisely  what 
in  an  individualistic  society  the  capitalist  does  as  an  individual. 


CAPITAL  167 

The  productivity  of  capital.  There  are  some  extreme  social- 
ists who  deny  that  the  capitalist  performs  any  necessary  func- 
tion. If  that  were  true,  it  would  be  hard  to  frame  an  argument 
to  show  that  society  as  a  whole  should  do  precisely  what  the 
capitalist  is  doing.  The  socialist  would  then  have  to  admit  that 
the  capitalist,  instead  of  performing  a  useless  function,  performs 
a  most  important  one,  —  so  important  that  society  as  a  whole 
should  take  it  over.  To  say  that  society  should  do  its  own 
investing  is  to  say  that  it  should  become  its  own  capitalist. 
This  would  present  a  question  to  be  debated.  The  question 
might  be  stated  as  follows :  Can  the  useful  function  of  coordi- 
nating labor  performed  at  different  times  be  done  more  economi- 
cally and  satisfactorily  by  the  state,  or  by  the  society  as  a  whole, 
than  by  private  individuals  ?  Or  the  question  might  be  put  in 
this  way :  What  forms  of  investment  and  ownership  should 
be  undertaken  by  society  as  a  whole,  and  what  should  be  left  to 
private  individuals  ?  Only  extremists  would  refuse  to  discuss 
this  question.  There  are,  however,  some  who  are  so  very  ex- 
treme as  to  deny  that  the  state  or  society  should  do  any  invest- 
ing or  own  any  capital.  Others  go  to  the  opposite  extreme  by 
denying  that  the  individual  should  do  any  investing  or  own 
any  capital.  Wisdom  probably  lies  somewhere  between  the  two 
extremes.  The  real  difference,  therefore,  between  the  reason- 
able individualist  and  the  reasonable  socialist  is  one  of  degree. 
The  reasonable  individualist  will  maintain  that,  in  the  absence 
of  a  special  or  convincing  reason  to  the  contrary,  the  individual 
should  be  allowed  to  invest  and  to  own  capital,  and  that  the 
case  must  be  proved  against  him  before  he  is  forbidden  to  do 
so.  The  reasonable  socialist,  on  the  other  hand,  holds  that  the 
presumption  is  in  favor  of  public  and  against  private  ownership 
of  capital,  —  that  unless  special  and  convincing  reason  to  the 
contrary  is  shown,  the  public  and  not  private  individuals 
should  own  capital.  He  places  the  burden  of  proof  on  the 
one  who  wishes  to  own  private  capital. 


CHAPTER  XIV 
THE  ORGANIZATION  OF  BUSINESS 

Large  capital  necessary.  The  growth  of  machine  production 
has  made  necessary  such  large  aggregations  of  capital  as  to 
require  the  combined  accumulations  of  numbers  of  men.  In 
comparatively  few  cases  does  a  single  individual  possess  enough 
capital  to  equip  a  modern  factory,  railroad,  steamship  company, 
mine,  or  even  a  large  mercantile  house.  Were  it  not  possible 
to  combine  the  capital  of  a  number  of  individuals,  large-scale 
production  would  be  the  privilege  of  only  a  few  very  wealthy  men. 

Methods  of  combining  capital.  There  are  three  distinct 
methods  of  combining  capital.  One  is  known  as  the  partner- 
ship, another  is  the  corporation,  or  joint-stock  company,  and 
the  third  is  the  cooperative  society.  The  partnership  is  a  mere 
combination  of  two  or  more  individuals  in  the  ownership  and 
management  of  a  given  business,  in  which  each  partner  is 
fully  responsible  for  the  acts  and  liabilities  of  the  group.  The 
partnership  is  merely  an  enlargement  of  the  individual.  The  in- 
dividual who  owns  and  operates  his  own  business  is  of  course 
fully  responsible  for  all  debts  and  obligations,  and,  subject  to 
bankruptcy  and  homestead  laws,  all  his  property  may  be  taken 
in  payment  of  any  obligation  incurred  in  the  business.  Where 
two  or  more  men  join  together  in  a  partnership,  each  partner  is 
responsible  in  the  same  sense  and  to  the  same  extent  as  he 
would  be  if  he  were  the  sole  owner. 

Difficulties  of  partnership.  Obviously  a  partnership  on  these 
terms  is  possible  only  among  men  who  are  very  intimately 
acquainted  with  one  another  and  who  have  complete  confidence 
in  one  another.  Since  each  partner  is  fully  responsible  for  the 
acts  of  every  other,  it  would  be  extremely  hazardous,  not  to 

168 


THE  ORGANIZATION  OF  BUSINESS  169 

say  foolhardy,  for  anyone  to  form  a  partnership  with  an  indi- 
vidual with  whom  he  was  not  intimately  acquainted  and  concern- 
ing whose  honesty  and  solvency  he  had  the  slightest  suspicion. 
Incompetent  or  dishonest  partners  have  caused  the  financial 
ruin  of  many  an  otherwise  sound  and  capable  business  man. 

The  corporation.  The  modern  expansion  of  business  would 
hardly  have  been  possible  without  some  form  of  organization 
which  would  permit  the  association  of  larger  numbers  of  men 
than  are  possible  under  a  partnership.  This  has  given  rise  to 
the  corporation,  or  the  joint-stock  company.  The  distinguishing 
difference  between  the  corporation  and  the  partnership  lies  in 
what  is  known  as  limited  liability.  In  a  corporation  the  liability 
of  each  shareholder  is  strictly  limited.  The  corporation  may 
become  bankrupt,  but  the  individual  members  or  shareholders 
can  be  called  upon  only  for  definite  sums  to  make  good  the 
debts  of  the  corporation.  In  the  ordinary  case,  each  individual 
puts  a  certain  sum  of  money  into  the  fund.  This  may  be  lost, 
but  he  cannot  be  called  upon  for  additional  sums  to  make  good 
further  losses.  In  other  cases,  such  as  our  national  banks, 
the  shareholder  may  not  only  lose  what  he  has  put  into  the 
fund  but  may  be  assessed  an  equal  amount  in  addition.  This 
is  sometimes  called  double  liability. 

Suppose,  for  example,  it  were  considered  necessary  to  have 
$100,000  of  capital  with  which  to  start  a  business.  This 
capital  may  be  divided  into  a  thousand  shares  of  $100  each. 
(A  larger  number  of  shares  of  smaller  denomination  or  a 
smaller  number  of  larger  denomination  may,  of  course,  be 
decided  upon.)  These  shares  are  represented  by  bits  of  printed 
paper  which  serve  as  evidence  to  show  that  the  money  has 
been  put  into  the  fund.  A  thousand  different  individuals  may 
buy  one  share  each  or  a  smaller  number  may  each  buy  a 
different  number  of  shares.  For  each  $100  which  any  indi- 
vidual puts  in,  he  receives  one  of  these  bits  of  paper,  which 
come  to  be  called  shares  or  stock  certificates  or  some  other 
such  name.  After  the  shares  are  all  sold,  there  is  the  fund 


1 70          PRINCIPLES  OF  POLITICAL  ECONOMY 

of  $100,000  in  money  available  for  starting  the  business.  The 
general  rule  is  that  each  contributor  shall  have  a  vote  for  each 
share  which  he  has  purchased.  It  would  therefore  be  possible 
for  one  individual  to  own  more  than  half  the  shares,  provided 
he  had  invested  more  than  $50,000  in  the  enterprise.  Owning 
more  than  half  the  shares,  he  could  always  cast  the  majority 
vote  and  control  the  corporation,  electing  himself  and  his 
particular  friends  to  all  the  offices,  and  virtually  controlling  the 
business.  In  some  cases,  however,  such  a  concentration  of 
ownership  is  not  permitted. 

Limited  liability.  Only  the  officers  of  the  corporation  are 
empowered  to  act  for  the  corporation ;  the  individual  share- 
holder who  is  not  an  officer  has  no  power  to  obligate  the 
corporation  in  any  way.  One  therefore  does  not  need  to 
scrutinize  the  solvency  or  the  character  of  his  fellow  share- 
holders as  closely  as  would  be  necessary  in  a  partnership. 
Again,  the  individual  shareholder  has  no  responsibility  for  the 
acts  of  the  corporation  beyond  that  which  has  already  been 
indicated ;  that  is,  if  the  business  fails,  the  affairs  of  the 
corporation  may  be  wound  up,  but  he  can  lose  only  the  sum 
which  he  originally  subscribed,  or,  in  the  case  of  double 
liability,  that  sum  plus  an  equal  sum. 

Some  weaknesses  of  the  corporation.  This  device  of  the 
joint-stock  company  with  limited  liability  has  made  possible 
the  aggregation  of  vast  sums  of  capital,  running  up  into  mil- 
lions and  hundreds  of  millions  of  dollars,  for  the  purpose  of 
carrying  on  great  business  enterprises.  Individuals  who  never 
saw  or  heard  of  one  another,  living  in  different  parts  of  the 
country,  sometimes  in  different  parts  of  the  world,  may  own 
shares  in  the  same  corporation,  having  contributed  their  capital 
to  the  joint  fund  for  the  carrying  on  of  the  business.  This 
has  been  one  of  the  great  factors  in  building  up  all  modern 
enterprise.  It  is  almost  as  important  as  some  of  the  great 
mechanical  inventions.  But,  like  all  great  inventions,  it 
carries  with  it  certain  difficulties.  For  example,  it  has  made 


THE  ORGANIZATION  OF  BUSINESS  I /I 

individual  enterprise  a  practical  impossibility,  except  in  those 
cases  where  small-scale  production  is  as  efficient  as  large- 
scale  production.  On  the  other  hand,  it  has  given  individuals 
with  only  small  sums  of  capital  to  invest  the  opportunity  to 
participate  in  the  profits  of  large-scale  production.  In  the 
latter  sense  it  has  been  a  democratic  institution.  The  fact, 
however,  that  individuals  vote  in  proportion  to  the  number 
of  shares  which  they  own  has  tended  to  destroy  some  of  the 
democracy  and,  in  some  cases  at  least,  to  put  the  management 
of  the  corporation  into  the  hands  of  a  plutocratic  oligarchy ; 
that  is,  a  few  large  shareholders,  who  control  the  majority  of 
the  stock,  can  always  control  the  corporation,  sometimes  to  the 
disadvantage  of  the  small  shareholders,  who  can  never  cast  a 
majority  vote.  Various  limitations  upon  the  voting  power  have 
been  proposed  and  introduced  for  the  purpose  of  curbing  the 
rapacity  of  the  large  shareholders.  In  spite  of  these,  however, 
many  a  fortune  has  been  built  up  through  the  machinations 
of  large  shareholders  and  the  robbing  of  small  shareholders. 

Multiplied  power  and  divided  responsibility.  Another  dis- 
advantage of  the  corporation  is  found  in  its  impersonal  character. 
A  decade  or  so  ago  the  social  psychologists  were  engaged 
with  the  problem  of  the  mob  mind.  Before  the  analysis  was 
carried  very  far,  it  was  discovered  that  the  mob  mind  did  not 
present  any  special  mystery  as  distinct  from  the  individual 
mind.  The  mob  thinks  and  acts  precisely  as  any  of  its  indi- 
viduals would  think  or  act  were  his  power  greatly  increased 
and  his  sense  of  responsibility  greatly  diminished.  That  is 
precisely  what  the  presence  of  numbers  does  for  the  individual 
when  they  are  all  moved  by  a  common  impulse ;  it  gives  him 
a  sense  of  power  proportionate  to  the  numbers,  and  at  the 
same  time  the  very  fact  of  numbers  diminishes  his  own  sense 
of  responsibility.  That  is  why  the  mob  is  so  like  a  monster, 
for  the  difference  between  a  man  and  a  monster  is  precisely 
that,  —  the  monster  feels  a  sense  of  power  and  does  not  feel 
a  sense  of  responsibility. 


1/2          PRINCIPLES  OF  POLITICAL  ECONOMY 

Something  of  the  same  kind  exists  in  the  case  of  an  indus- 
trial corporation.  There  also  you  have  the  circumstance  of 
increased  power  combined  with  diminished  responsibility.  The 
sense  of  power  comes  not  so  much  from  the  presence  of 
numbers,  as  in  the  case  of  the  mob,  as  from  the  larger  fund 
of  competitive  capital  which  is  brought  together.  The  dimin- 
ished sense  of  responsibility  comes  partly  from  the  mere  fact 
of  numbers  (no  individual  member  of  the  corporation  feels 
the  full  responsibility  for  the  acts  of  the  whole),  partly  from 
the  impersonal  character  of  the  conduct  of  the  corporation, 
and  partly  from  the  limited-liability  feature  of  most  of  the 
charters.  Most  of  the  evils  of  corporation  practice  grow  out 
of  this  simple  situation,  and  the  remedy  must  be  applied  at  this 
point.  The  sense  of  responsibility  must  be  made  commensurate 
with  the  sense  of  power. 

This  is  to  be  accomplished,  not  by  reducing  the  powers  of 
corporations  so  much  as  by  increasing  the  sense  of  responsi- 
bility of  its  individual  members.  If  they  can  be  made  to  feel 
the  same  responsibility  for  the  acts  of  the  corporation  which 
they  feel  for  their  individual  acts,  the  corporation  problem  as 
such  will  be  solved  ;  and  it  will  be  solved  in  no  other  way. 
This  means  the  frank  adoption  of  the  maxim  that  crime  is 
always  personal,  and  that  corporate  law-breaking  is  to  be  dealt 
with  in  precisely  the  same  way  as  individual  law-breaking. 

Size  a  matter  of  importance.  In  fact,  it  may  be  necessary 
to  go  even  farther  and  enforce  stricter  responsibility  upon 
members  of  corporations,  particularly  the  larger  corporations, 
than  we  do  upcn  individuals.  If  the  principle  we  have  laid 
down  is  sound,  it  furnishes  no  support  to  the  view  that  the  mere 
bigness  of  a  corporation  is  not  a  matter  for  the  law  to  take  into 
account.  From  our  point  of  view,  bigness  is  an  important 
factor  in  the  problem ;  for  the  bigger  the  corporation,  the 
greater  its  power  and  the  less  the  sense  of  responsibility  on 
the  part  of  each  member.  That  situation  alone  calls  more  and 
more  for  strict  regulation  and  enforcement  of  responsibility,  the 


THE  ORGANIZATION  OF  BUSINESS  173 

bigger  the  corporation  becomes.  Its  increased  power  is  a 
good  thing,  provided  that  power  be  used  productively  and 
not  acquisitively ;  but  there  is  no  certainty  that  it  will  be 
used  productively  unless  subjected  to  the  strictest  control. 

This  does  not  mean  that  large  corporations  have  worse  dis- 
positions than  small,  or  that  their  members  are  meaner  men 
than  the  members  of  small  corporations.  It  only  means  that 
the  disproportion  between  power  and  responsibility  increases 
with  the  size  of  the  corporation. 

As  a  homely  illustration  let  us  take  the  common  house 
cat,  whose  diminutive  size  makes  her  a  safe  inmate  of  our 
household  in  spite  of  her  playful  disposition  and  her  liking 
for  animal  food.  If,  without  the  slightest  change  of  char- 
acter or  disposition,  she  were  suddenly  enlarged  to  the  dimen- 
sions of  a  tiger,  we  should  at  least  want  her  to  be  muzzled 
and  to  have  her  claws  trimmed ;  whereas  if  she  were  to 
assume  the  dimensions  of  a  mastodon,  I  doubt  if  any  of  us 
would  want  to  live  in  the  same  house  with  her.  And  it  would 
be  useless  to  argue  that  her  nature  had  not  changed,  that 
she  was  just  as  amiable  as  ever,  and  no  more  carnivorous  than 
she  always  had  been.  Nor  would  it  convince  us  to  be  told 
that  her  productivity  had  greatly  increased  and  that  she  could 
now  catch  more  mice  in  a  minute  than  she  formerly  could  in 
a  week.  We  should  be  afraid  lest,  in  a  playful  mood,  she 
might  set  a  paw  upon  us,  to  the  detriment  of  our  epidermis, 
or  that  in  her  large-scale  mouse-catching  she  might  not  always 
discriminate  between  us  and  mice. 

Stratification  of  society.  There  is  another  problem,  not 
strictly  a  corporation  problem,  but  a  social  problem  growing 
out  of  the  prevalence  of  the  corporate  form  of  industrial 
organization.  That  is  the  problem  of  the  widening  gap  be- 
tween employers  and  employed,  or,  more  strictly,  between  capi- 
talists and  laborers.  It  may  be  laid  down  as  a  general  social 
law  that  anything  which  separates  people  into  sharply  dis- 
tinguishable groups,  whether  it  be  a  geographical  boundary,  a 


174          PRINCIPLES  OF  POLITICAL  ECONOMY 

racial  difference,  a  difference  of  religious  creeds,  or  a  class 
distinction,  will  produce,  between  the  groups  thus  separated, 
first  ignorance  of  one  another,  then  suspicion  growing  out  of 
that  ignorance,  then  misunderstanding  growing  out  of  that  igno- 
rance and  suspicion,  and  finally  open  warfare  whenever  a  pre- 
text is  found  ;  whereas  anything  which  bridges  over  these  gaps, 
or  brings  people  together  regularly  and  normally,  creates  first 
knowledge  of  one  another,  then  confidence  instead  of  suspi- 
cion, then  understanding  instead  of  misunderstanding,  and 
finally  lasting  peace  because  no  difficulty  seems  large  enough 
to  serve  as  a  pretext  for  war.  t 

Now  the  joint-stock  form  of  organization,  though  a  most 
effective  industrial  device,  has  had  at  least  one  serious  social 
result :  it  has  widened  somewhat  the  gap  which  would  other- 
wise have  existed  between  the  employing  group  and  the  em- 
ployed group.  When  employers  are  known  by  their  personality 
and  can  come  in  some  kind  of  personal  or  direct  contact  with 
employees,  and  when,  therefore,  employer  and  employee  know 
something  about  one  another,  there  can  be  no  such  degree  of 
suspicion  of  one  another  as  now  exists  ;  where  ignorance  dis- 
appears, suspicion  tends  to  disappear  also.  But  when  employers 
stand  as  the  shareholders  of  a  corporation  in  a  purely  imper- 
sonal relation  to  employees,  when  the  average  employer  or 
shareholder  knows  nothing  personal  about  the  employees  of 
the  corporation,  and  the  employees  know  absolutely  nothing 
personal  about  the  shareholding  employers,  there  is  on  either 
side  of  the  line  about  as  great  a  degree  of  ignorance  of  those 
on  the  other  side  as  can  be  found  anywhere  in  modern 
social  life. 

Widening  the  gap  between  social  classes.  That  gap  which 
separates  the  two  groups  is  made  so  wide  as  to  produce  very 
much  the  same  result  as  is  produced  by  a  difference  of  color 
between  races  or  a  difference  of  religion  between  too  sharply 
contrasted  religious  groups.  Such  a  state  of  things  has  never 
failed  in  the  history  of  the  world  to  produce  suspicion,  jealousy, 


THE  ORGANIZATION  OF  BUSINESS  175 

misunderstanding,  and,  on  the  slightest  pretext,  open  hostility ; 
and,  so  far  as  we  are  able  to  see  into  the  future,  there  is  not  the 
slightest  ground  for  hoping  that  such  a  condition  ever  will  fail 
to  produce  these  same  undesirable  results.  In  other  words,  we 
need  not  hope  for  social  peace  or  for  any  cessation  of  the  con- 
flict of  classes  until  that  chasm  is  in  some  way  bridged  over  or 
made  to  disappear. 

This  result  can  hardly  be  achieved  by  doing  away  with  joint- 
stock  corporations ;  they  are  too  effective  as  industrial  devices 
to  make  such  a  program  tolerable ;  but  if  we  are  ever  to  have 
anything  resembling  social  peace,  some  way  must  be  found  to 
bring  the  employing  classes  and  the  employed  into  personal 
relationships  one  with  another.  The  ideal  is  undoubtedly  that 
of  having  the  workers  in  our  industrial  establishments  become 
also  the  owners  of  the  stock  of  the  corporation.  If  that  result 
could  possibly  be  achieved,  there  would  be  an  end  of  the  present 
phase  of  warfare. 

How  this  is  to  be  achieved  is  another  question.  It  will  never 
be  achieved  until  our  corporation  laws  and  our  judicial  pro- 
cedure relating  to  corporations  are  made  efficient  enough  to 
make  it  a  safe  venture  for  a  man  of  small  means  to  buy  a  share 
in  an  industrial  corporation.  So  long  as  these  things  are  so 
inefficient  as  to  enable  large  shareholders  and  rings  to  freeze 
out  the  small  shareholders,  or  in  any  way  to  make  it  hazardous 
for  a  man  of  small  means,  such  as  the  average  workingman, 
to  invest  in  a  share,  it  will  never  be  accomplished.  This  looks 
like  a  legal  problem  rather  than  a  legislative  problem,  and  it 
is  for  the  legal  fraternity  and  the  courts  to  solve.  If  they  will 
not  solve  it,  or  if  they  ultimately  prove  unable  to  solve  it,  it 
may  be  necessary  to  reform  our  courts.  Many  discriminating 
persons  are  beginning  to  believe  that  the  judicial  branch  of  our 
government,  instead  of  being  the  most  efficient,  is  less  efficient 
even  than  the  legislative  or  the  executive. 

The  trust.  It  is  important  that  we  distinguish  between  the 
corporation,  as  we  have  just  described  it,  and  the  trust,  or 


176          PRINCIPLES  OF  POLITICAL  ECONOMY 

combine.  The  corporation  is  an  organization  of  individuals  who 
put  their  capital  together  in  order  to  carry  on  a  business  which 
requires  more  capital  than  is  likely  to  be  possessed  by  any  one 
of  them.  The  trust,  or  combine,  is  mainly  an  organization  of 
corporations  (though  it  may  also  include  a  few  individual  capi- 
talists), for  the  purpose  of  controlling  the  market.  While  such 
organizations  are  to  be  distinguished  sharply  from  corporations 
as  such,  nevertheless  they  could  scarcely  have  come  into  exist- 
ence if  the  corporation  had  not  preceded  them  and  prepared 
the  way.  They  may  therefore  be  called  extreme  developments 
of  the  corporation  idea,  though  not  necessary  developments. 
As  to  these  extreme  developments  of  the  corporation  principle, 
it  is  becoming  more  and  more  apparent  that  their  power  for 
evil  lies  wholly  in  their  power  of  controlling  and  manipulating 
prices.  If  that  power  could  be  taken  out  of  their  hands,  we 
should  then  have  nothing  to  fear  from  them. 

Control  of  prices.  If  they  could  not  succeed  and  survive  in 
competition  through  their  power  over  prices,  they  could  then 
succeed  only  through  their  power  of  production.  If  they  should 
then  survive,  the  mere  fact  of  their  survival  would  prove  their 
fitness  to  survive.  This  has  been  pointed  out  many  times  by 
scholars ;  but  the  practical  politicians,  with  their  unerring  in- 
stinct for  the  wrong  way,  have  ignored  it  and  have  been  trying 
various  hard  and  useless  methods  of  dealing  with  the  problem. 
Eventually,  after  having  tried  every  possible  way  of  going  wrong, 
we  shall  apply  the  simple  and  direct  remedy  of  government 
control  of  prices  wherever  a  monopoly  exists. 

It  is  not  necessary  to  indulge  in  any  sentimental  rhapsodies 
on  the  subject  of  the  people  and  their  control  over  affairs  of 
this  kind.  Government  affairs  are  controlled  by  politicians, 
and  politicians  are  no  more  interested  in  the  people  than  are 
the  trust  magnates  themselves.  The  choice  is  a  hard  one.  But 
where  competition  fails  to  regulate  prices,  these  prices  are 
going  to  be  fixed  arbitrarily  by  someone.  In  the  absence  of 
government  control  they  are  fixed  by  the  trust  operators 


THE  ORGANIZATION  OF  BUSINESS  177 

alone.  Where  there  is  government  control,  they  are  fixed  by 
the  joint  action  of  the  politicians  and  the  trust  operators.  Their 
interests  are  not  the  same,  and,  as  the  result  of  their  pulling 
and  hauling,  prices  will  not  be  fixed  quite  so  completely  in  the 
interest  of  the  trusts,  but  more  in  the  interest  of  the  trusts 
and  the  politicians.  Since  the  people  can  control  the  trusts  after 
a  fashion  by  refusing  to  buy  of  them,  and  the  politicians  after  a 
fashion  by  refusing  to  vote  for  them,  it  will  happen  that  through 
this  double  control  the  interests  of  the  people  will  be  somewhat 
better  safeguarded  than  they  are  now. 

Incidentally  this  would  destroy  most  of  the  trusts.  No  trust 
exists  by  virtue  of  its  superior  productive  powers.  Every  one  de- 
pends for  its  existence  upon  its  superiority  in  buying  or  selling ; 
that  is,  upon  its  power  over  prices.  Take  away  this  power  and 
enable  the  outside  concerns  to  match  their  productivity  against 
that  of  the  trust,  and  outside  competition  will  increase  and 
force  the  trust  to  break  up  into  its  most  efficient  productive 
units,  as  distinguished  from  the  most  efficient  bargaining  units. 

The  cooperative  society.  It  has  often  been  proposed  to 
substitute  a  radically  different  form  of  business  organization 
for  the  corporation,  or  joint-stock  company.  This  is  known  as 
the  cooperative  society.  In  a  sense  the  corporation  itself  is 
cooperative,  but  it  differs  from  the  cooperative  society  in  two 
fundamental  characters : 

In  the  first  place,  the  corporation  involves  cooperation 
among  the  owners,  whereas  the  cooperative  society  involves 
cooperation  among  the  workers.  In  the  chapter  on  Capital 
we  saw  that  the  rise  of  modern  industrial  conditions  had 
brought  about  a  sharp  separation  of  owners  and  workers.  In 
the  original  form  of  manufacturing  (that  is,  the  small  shop, 
where  the  workman  owned  the  shop  and  the  tools)  we  had  the 
function  of  ownership  and  of  labor  combined  in  the  same 
individual.  With  the  rise  of  the  factory  system  these  two 
functions  were  separated.  The  corporation  represents  the 
organization  of  owners,  and  maintains  the  separation  of  owners 


178          PRINCIPLES  OF  POLITICAL  ECONOMY 

from  workers.  The  cooperative  society,  on  the  other  hand,  repre- 
sents an  association  of  workers.  Under  the  corporation,  owner- 
ship and  management  go  together ;  under  the  cooperative 
society,  labor  and  management  go  together. 

In  the  second  place,  in  a  corporation,  as  we  have  seen,  the 
various  individuals  who  contribute  capital  vote  in  proportion 
to  the  number  of  shares  which  they  own.  In  a  cooperative 
society  each  individual  has  one  vote,  regardless  of  the  number 
of  shares  which  he  owns  or  the  amount  of  capital  which  he 
has  put  in.  One  man,  one  vote  is  the  rule- here,  whereas  one 
share,  one  vote  is  the  rule  of  the  corporation.  It  is  inaccurate, 
however,  to  say  that  capital  votes  in  a  corporation.  Only  men 
vote,  and  a  man  may  vote  once  for  each  share  which  he  owns, 
or  he  may  vote  once  and  once  only,  regardless  of  the  number 
of  his  shares.  As  to  the  comparative  merits  of  these  two  forms 
of  organization,  the  opinion  of  the  world  is  somewhat  divided. 
It  must  be  admitted  that  the  corporation  has  had  much  the 
larger  growth,  though  in  recent  years  the  cooperative  society 
has  been  gaining  ground  rapidly. 

Comparative  merits  of  the  corporation  and  the  cooperative 
society.  It  is  the  opinion  of  the  present  writer  that  the  ques- 
tion will  always  be  decided  on  rather  definite  economic  grounds. 
Where  the  difficult  problem  is  that  of  getting  sufficient  capital, 
he  who  supplies  the  capital  must  be  placated  ;  that  is  to  say, 
where  everything  else  is  easily  obtainable,  where  there  are  always 
plenty  of  laborers  seeking  employment,  plenty  of  raw  material 
to  be  had,  and  buyers  ready  to  buy  the  finished  product,  but 
where  the  limiting  factor  is  capital  and  the  puzzling  thing  is 
to  know  where  to  get  capital,  favorable  terms  must  be  offered 
to  the  capitalist  and  he  must  be  allowed  to  have  his  way,  or 
the  capital  cannot  be  secured.  In  the  early  stages  of  manu- 
facturing expansion,  capital  was  the  limiting  factor. 

The  limiting  factor  will  dominate.  Now  and  then  conditions 
arise  under  which  capital  is  not  the  limiting  factor.  Among 
farmers,  for  example,  where  a  creamery  is  needed,  it  is  never 


THE  ORGANIZATION  OF  BUSINESS  179 

very  difficult  to  raise  capital  enough  to  equip  the  creamery  ; 
the  difficulty  is  to  get  business  ;  that  is,  to  get  the  farmers  to  pro- 
duce the  milk  and  sell  the  cream  to  the  creamery.  In  these 
cases  the  producer  of  milk  must  be  placated  and  persuaded  to 
join  the  organization.  He  must  therefore  be  given  control. 
This  gives  rise  to  what  is  known  as  the  cooperative  creamery, 
in  which  the  producing  farmers  own  the  plant,  direct  its 
management,  and  share  in  its  profits.  Such  a  creamery,  how- 
ever, is  cooperative  only  in  a  special  sense.  The  men  who 
work  in  the  creamery  are  employed  as  other  laborers  would 
be  employed  in  a  privately  owned  factory  of  any  kind.  A 
cooperative  store  is  likewise  dependent  upon  custom.  It  is 
easier  to  get  capital  and  to  hire  clerks  and  salesmen  than  it 
is  to  induce  people  to  trade  at  the  store.  Therefore  the 
patrons  of  the  store  must  be  placated  and  given  control.  The 
great  cooperative  societies,  as  pointed  out  in  the  chapter  on 
Competition,  have  been  societies  where  cooperative  buying 
and  selling  was  substituted  for  competitive  buying  and  selling. 
That  is,  they  have  been  mercantile  societies.  They  do  not 
represent  cooperation  among  producers  or  among  the  workers 
in  the  stores  and  factories,  for  the  workers  in  the  stores 
and  factories  are  hired  on  the  same  terms  as  workers  in  the 
privately  owned  or  corporation  owned  stores  and  factories. 

There  are  a  few  cases  of  real  cooperation,  but  they  are  not 
very  conspicuous.  The  only  real  cooperation  is  cooperation 
among  workers,  where  the  men  who  do  the  work  in  a  fac- 
tory manage  it  themselves  or  direct  its  management  and  fur- 
nish or  hire  the  capital.  This  form  of  cooperation  has  not  yet 
proved  very  successful,  mainly  because  labor  has  seldom  been 
the  limiting  factor.  It  is  generally  so  easy  to  get  labor  that 
the  laborer  does  not  have  to  be  placated  and  given  much  con- 
trol. When  the  time  comes,  as  it  probably  will,  when  labor 
is  scarce  and  hard  to  find,  —  when  it  is  necessary  to  placate 
the  laborer  rather  than  the  capitalist  or  the  purchaser  of  finished 
products,  —  then  we  may  expect  that  this  form  of  cooperation 


1 80          PRINCIPLES  OF  POLITICAL  ECONOMY 

will  gain  ground.  If  the  laborer  has  to  be  placated  in  order 
to  induce  him  to  work  in  an  establishment,  he  will  be  given 
more  and  more  control  over  it. 

Control  by  the  indispensable  person.  Generally  speaking, 
the  indispensable  man,  whether  he  be  the  one  who  furnishes 
capital,  the  one  who  furnishes  raw  material  (as  in  the  case  of 
the  cooperative  creamery),  the  one  who  buys  the  finished 
product  (as  in  the  case  of  the  cooperative  store),  or  the  one 
who  supplies  the  labor  (as  in  the  case  of  the  true  cooperative 
society),  is  in  so  strong  a  position  that  he  can  dictate  terms 
to  all  the  others.  When  the  laborer  becomes  so  indispensable, 
that  is,  so  scarce  and  hard  to  find  that  the  average  business 
enterprise  must  wait  on  his  will,  he  will  be  in  so  strong  a  posi- 
tion that  he  can  dictate  terms  to  all  the  others  who  participate 
in  the  enterprise.  He  will  then,  without  resort  to  force,  really 
direct  its  management  on  a  purely  voluntary  and  contractual 
basis.  There  is  not  a  very  good  prospect  for  cooperation  among 
laborers  under  any  other  conditions.  There  is  a  strong  proba- 
bility that,  with  the  rapid  accumulation  of  capital  (especially  if 
habits  of  frugality  and  saving  are  encouraged)  and  with  the 
growing  scarcity  of  labor  (especially  if  wise  immigration  laws 
are  passed  and  a  high  standard  of  living  among  laborers  is 
encouraged),  there  will  come  a  time  when  capital  will  be  almost 
superfluous  because  of  its  great  abundance,  and  every  individual 
laborer  will  become  almost  indispensable  because  of  the  scarcity 
of  labor.  Then  we  must  expect  that  capital  will  lose  the  power 
to  direct  the  management  of  industries  and  will  take  the  posi- 
tion of  a  hireling.  The  laborer  will  then  gain  control  and 
assume  the  position  of  the  master. 


CHAPTER  XV 
THE  BALANCING  OF  THE  FACTORS  OF  PRODUCTION 

Balanced  rations,  fertilizers,  etc.  Every  farmer  nowadays  is 
familiar  with  the  idea  of  a  balanced  ration  for  his  live  stock  and 
a  balanced  fertilizer  for  his  soil.  Students  of  human  dietetics 
are  also  familiar  with  the  idea  of  a  balanced  ration  for  man. 
By  a  balanced  ration  is  meant  one  which  contains  the  different 
food  elements  in  the  proportion  in  which  the  body  needs  them. 
By  a  balanced  fertilizer  is  meant  a  fertilizer  which  contains  the 
different  elements  of  plant  food  in  the  proportion  in  which 
plants  need  them.  Sometimes,  however,  a  balanced  fertilizer 
may  mean  a  fertilizer  which  will  balance  up  the  soil  and  put 
into  it  the  elements  of  plant  food  which  it  lacks,  in  order  that 
it  may  possess  those  elements  in  the  proportion  in  which  plants 
need  them.  Thus,  a  soil  that  is  rich  in  nitrogen  but  deficient 
in  potash  would  need  a  fertilizer  that  was  particularly  rich  in 
potash.  Not  long  ago  the  writer  was  at  the  home  of  a  pro- 
fessor of  agriculture  in  one  of  our  leading  agricultural  colleges. 
The  grass  was  growing  up  between  the  bricks  in  the  sidewalk 
in  front  of  the  agriculturist's  house.  As  a  demonstration  he 
was  using  fertilizer  to  kill  the  grass.  It  was  excellent  fertilizer, 
and  in  the  proper  relation  it  would  have  made  the  grass  grow 
more  luxuriantly.  He  simply  put  on  too  much.  The  result  of 
this  bad  balance  was  to  kill  the  grass.  In  addition  to  those 
elements  of  plant  food  which  ordinarily  go  into  the  fertilizer, 
moisture  and  other  factors  are  required.  If  there  is  too  much 
of  one  and  too  little  of  another  factor,  plants  will  not  grow. 
Everyone  is  familiar  with  the  fact  that  on  swampy  land  plants 
will  not  grow  because  there  is  too  much  water,  and  that  on 
desert  land  they  will  not  grow  because  there  is  too  little. 

181 


1 82          PRINCIPLES  OF  POLITICAL  ECONOMY 

Balanced  ingredients.  All  these  facts  are  mentioned  to  make 
it  perfectly  clear  to  the  student  that  in  almost  any  line  of  pro- 
duction the  question  of  the  balance  of  the  factors  of  production 
is  a  very  important  one.  All  the  factors  may  be  present,  but  if 
they  are  not  in  the  right  proportions,  production  will  be  reduced 
or  even  destroyed.  This  is  true  not  only  of  the  elements  of 
plant  and  animal  growth,  which  are  agents  of  production,  but 
of  tools,  implements,  raw  materials,  and  other  things  which  enter 
into  a  mechanical  industry.  In  the  manufacture  of  old-fashioned 
gunpowder,  for  example,  charcoal,  saltpeter,  and  sulphur  were 
required,  and  they  had  to  be  combined  in  fairly  definite  propor- 
tions. If  it  happened  that  there  was  more  charcoal  on  the 
market  than  would  combine  with  the  limited  supply  of  one 
of  the  other  ingredients,  say  saltpeter,  the  production  of  gun- 
powder was  limited  by  the  small  supply  of  saltpeter  and  not 
by  the  supply  of  charcoal.  Only  as  much  gunpowder  could 
be  manufactured  as  the  small  supply  of  saltpeter  would  permit. 
In  the  making  of  old-fashioned  mortar,  lime  and  sand  were 
required.  Too  much  of  either  one  or  too  little  of  the  other 
would  spoil  the  mortar.  If  in  any  given  situation  there  should 
happen  to  be  a  scarcity  of  sand,  very  little  lime  could  be  used, 
because  only  as  much  mortar  could  be  made  as  the  limited  sup- 
ply of  sand  would  permit.  Again,  however  abundant  both  lime 
and  sand  might  be  for  the  making  of  mortar,  if  brick  and  stone 
were  scarce,  very  little  mortar  could  be  used,  and  there  would 
therefore  be  very  little  productive  demand  for  sand  and  lime. 

Balanced  agents  of  production.  This  principle  applies  not 
only  to  the  raw  materials  which  are  used  in  various  lines  of 
production,  but  to  the  active  agents  themselves,  such  as  labor. 
However  numerous  the  hodcarriers  might  be,  if  there  were  a 
great  scarcity  of  brick  and  stone  masons,  not  many  hodcarriers 
could  be  used.  The  farmer  who  had  plenty  of  land  and  tools, 
but  no  horses,  oxen,  or  tractors,  would  not  be  able  to  use  either 
his  land  or  his  tools  effectively.  If  he  could  not  raise  the  money 
in  any  other  way,  it  would  pay  him  to  sell  some  of  his  tools  or 


BALANCING  OF  FACTORS  OF  PRODUCTION     183 

some  of  his  land  and  buy  horses,  in  order  to  restore  the  balance. 
At  bottom  this  is  much  the  same  problem  as  that  of  balancing 
rations  or  fertilizers.  Again,  however  much  land  he  might  pos- 
sess, if  he  lacked  equipment,  his  farm  would  not  be  very  pro- 
ductive. It  would  pay  him,  if  he  could  not  raise  the  money  in 
any  other  way,  to  sell  some  of  his  land  in  order  to  buy  equip- 
ment of  various  kinds.  Some  of  our  frontier  farmers  found 
themselves  in  possession  of  a  soil  which  was  very  rich  in  plant 
food.  They  lacked,  however,  other  forms  of  capital,  or  the 
money  wherewith  to  purchase  building  materials,  machinery, 
live  stock,  etc.  Many  of  them  virtually  sold  their  surplus  soil ; 
that  is,  they  grew  such  crops  as  they  could,  sold  them  off,  and 
took  no  pains  to  replace  the  fertility  which  was  used  up  in  the 
growing  of  the  crops.  They  are  said  to  have  "  mined  the  soil  "  ; 
that  is  to  say,  as  the  miner  extracts  his  mineral  and  puts  noth- 
ing back,  so  many  of  these  frontier  farmers  extracted  plant  food 
and  put  nothing  back.  Whatever  may  be  said  of  this  from  the 
point  of  view  of  national  policy,  it  was,  under  the  circumstances, 
undoubtedly  good  business  from  the  point  of  view  of  the  farmer. 
He  was  trying  to  balance  up  his  establishment.  Having  an 
abundance  of  plant  food  in  his  soil,  but  very  little  of  anything 
else,  he  found  it  to  his  advantage  to  sell  some  of  his  plant 
food  in  order  to  put  up  houses,  barns,  and  fences  and  purchase 
machinery  and  live  stock.  He  was  doing  virtually  the  same 
thing  that  another  farmer  would  do  who  found  himself  in  the 
possession  of  a  large  number  of  horses  and  no  plows  or  har- 
rows to  which  to  hitch  his  teams.  It  would  pay  him  to  sell  off 
some  of  his  horses  and  buy  enough  equipment  to  make  the 
remaining  horses  productive. 

A  balanced  nation.  This  principle  of  balancing  up  the  factors 
of  production  is  just  as  important  for  the  nation  as  a  whole  as 
it  is  for  the  individual  farmer  or  manufacturer.  The  country 
which  possesses  a  surplus  of  land  and  a  scarcity  of  labor  will 
find  that  its  land  is  very  ineffectively  used.  What  it  needs  is 
more  labor.  It  cannot  very  well  sell  its  land,  but  it  will  in  all 


1 84          PRINCIPLES  OF  POLITICAL  ECONOMY 

probability  pursue  a  policy  which  will  increase  its  labor  supply. 
Labor  under  such  conditions  will  be  in  great  demand,  and  for  the 
same  reason  that,  in  dietetics,  protein  will  be  in  great  demand 
if  it  is  scarce  while  the  other  food  elements  are  abundant.  In 
such  a  community  land  is  certain  to  be  cheap  and  labor  dear. 
The  high  price  of  labor,  the  ease  with  which  men  can  estab- 
lish themselves  on  the  land  as  independent  farmers,  or  get  re- 
munerative work,  encourages  early  marriages  and  large  families. 
This  is  especially  true  on  the  farms,  where  labor  is  scarce  and 
land  abundant.  Every  additional  child  is  money  in  the  farmer's 
pocket,  because  as  soon  as  the  child  is  old  enough  to  work  he 
helps  to  solve  the  ever-present  problem  of  scarcity  of  labor. 
Immigration  is  also  likely  to  be  encouraged  by  such  a  country. 
And  thus  from  two  sources  the  labor  supply  is  increased  in 
response  to  the  effort  to  balance  up  the  factors  of  production. 

But  tools  and  equipment  of  all  kinds,  which  are  generally 
included  under  the  word  capital,  are  almost,  though  not  quite, 
as  essential  as  either  labor  or  land.  If  capital  is  scarce  while 
one  or  both  of  the  other  factors  are  abundant,  it  will  be  in 
great  demand,  for  the  same  reason  that  labor  is  in  great  demand 
where  it  is  scarce  and  land  abundant,  or  that  water  is  in  great 
demand  where  there  is  an  abundance  of  land  with  all  the  ele- 
ments of  chemical  fertility,  but  a  scarcity  of  water.  An  over- 
populated  country,  on  the  other  hand,  finds  itself  with  a  badly 
balanced  industrial  system,  but  the  balance  is  in  this  case  dis- 
turbed in  the  opposite  direction.  Land  being  the  scarce  factor, 
every  acre  that  can  possibly  be  used  is  of  the  utmost  impor- 
tance. Labor,  on  the  other  hand,  is  cheap.  It  can  easily  be 
spared.  If  it  sees  fit  to  migrate  to  other  countries,  no  great 
effort  is  made  to  prevent  it,  and  no  high  price  is  offered  it  as 
a  reward  for  staying  at  home.  Under  such  circumstances,  to 
hold  an  acre  of  land  out  of  use  would  seriously  reduce  the 
total  production  of  the  community. 

Balanced  capital.  As  on  the  farm  or  in  the  factory  we  saw 
that  different  kinds  of  tools  have  to  be  combined,  so  we  should 


BALANCING  OF  FACTORS  OF  PRODUCTION     185 

find  that  different  kinds  of  capital,  or  tools,  have  to  be  combined 
in  the  nation  at  large.  If,  for  any  reason,  the  country  should 
find  an  oversupply  of  one  class  of  tools,  say  agricultural 
implements,  and  an  undersupply  of  another  class  of  tools,  say 
railroads  and  rolling  stock,  the  productive  power  of  the  whole 
nation  would  be  limited  by  the  deficiency  of  transportation 
facilities.  However  much  might  be  produced  with  the  agri- 
cultural implements,  if  it  could  not  be  transported  to  market,  it 
would  be  of  little  use.  This  would  be  a  case  of  badly  balanced 
national  capital.  The  result  would  be  that  the  industrial  system, 
if  it  were  a  good  system,  would  find  some  way  to  restore  the 
balance.  It  would  be  poor  economy,  under  such  circumstances, 
to  increase  the  production  of  agricultural  machinery.  That  would 
add  very  little  to  the  total  producing  power  of  the  nation.  If 
something  could  be  added  to  the  transportation  facilities,  that 
would  add  considerably  to  the  productive  power  of  the  nation. 
Under  a  well-organized  industrial  system  the  readjustment 
takes  place  automatically.  Farm  implements  become  cheap. 
Farmers  do  not  care  to  buy  any  more,  and  the  manufacturers 
are  discouraged  from  production.  Railroad-building,  however, 
is  stimulated  by  the  high  earnings  of  the  existing  railroads, 
and  the  productive  energy  of  the  community  is  diverted  from 
the  manufacture  of  agricultural  implements  to  the  building  of 
railroads  and  the  manufacture  of  railroad  equipment. 

If  we  reverse  the  supposition,  of  course  we  get  the  opposite 
results,  but  the  same  principles  will  be  at  work.  If  we  should 
find  an  overabundance  of  railroad  facilities  and  a  scarcity  of 
agricultural  implements,  then  it  would  be  to  the  interest  of  the 
country  to  have  more  agricultural  implements.  If  the  existing 
transportation  facilities  could  easily  carry  all  that  the  farms  pro- 
duce, and  more  too,  little  would  be  added  to  the  national 
product  by  building  more  railroads,  and  much  could  be  added  by 
manufacturing  more  farm  equipment  and  increasing  the  growth 
of  crops.  The  low  earnings  of  railroads  and  the  increased 
demand  for  farm  machinery  would  tend  to  divert  the  productive 


1 86          PRINCIPLES  OF  POLITICAL  ECONOMY 

power  of  the  nation  from  railroad-building  to  the  manufacture 
of  farm  implements  and  the  use  of  them  on  the  farms. 

This  principle  is  of  universal  application,  and  thousands  of 
illustrations  could  be  multiplied  if  it  were  necessary.  If  we 
apply  it  to  the  railroads  themselves,  we  find  it  working  in  the 
utmost  detail.  When  a  railway  system  does  not  have  rolling 
stock  enough  to  utilize  its  tracks,  its  capital  is  badly  balanced, 
and  naturally  the  thing  to  do  is  to  get  more  rolling  stock  and 
more  freight,  in  order  to  utilize  the  trackage  advantageously. 
In  other  cases  the  road  may  find  itself  with  more  rolling 
stock  and  more  business  than  can  be  done  effectively  on  its 
existing  trackage.  It  must  then  begin  adding  to  its  trackage 
rather  than  to  its  rolling  stock,  in  order  to  restore  the  balance. 

The  fundamental  problem  of  scientific  management.  The 
fundamental  problem  of  all  management,  whether  it  be  the 
management  of  a  diet  kitchen,  a  farmer's  feeding  lot,  a  farm 
as  a  whole,  a  factory,  a  railroad,  or  a  nation,  is  the  problem  of 
balancing  the  factors  of  production.  The  problem  of  managing 
the  nation  is  commonly  called  the  problem  of  statesmanship, 
and  the  fundamental  problem  of  all  statesmanship  is  that  of 
balancing  the  factors  of  national  life.  To  have  so  much  produc- 
tive power  as  to  tempt  barbarians  from  the  outside  to  invade 
and  rob,  and  so  little  military  defense  as  to  be  unable  to  repel 
barbaric  invasions,  is  to  invite  national  disaster.  On  the  other 
hand,  to  maintain  so  large  a  fighting  machine  as  to  interfere 
seriously  with  the  work  of  production  is  also  bad  statesmanship, 
because  it  preserves  a  bad  balance  of  the  factors  of  national 
life  and  prosperity.  To  encourage  immigration  and  the  multi- 
plication of  numbers  beyond  the  point  necessary  to  utilize  the 
land  effectively  also  produces  an  unbalanced  situation.  To  dis- 
courage immigration  or  the  multiplication  of  numbers  to  such  an 
extent  as  to  leave  the  land  inadequately  utilized  is  equally  bad. 

A  balanced  population.  The  greatest  danger  of  all,  however, 
and  the  one  which,  apparently,  is  least  appreciated  by  some  of 
our  statesmen,  is  that  of  producing  a  badly  balanced  population. 


BALANCING  OF  FACTORS  OF  PRODUCTION  187 

At  the  beginning  of  this  chapter  the  question  of  the  balancing 
of  the  hodcarriers  and  the  brick  and  stone  masons  was  men- 
tioned. This  may  be  taken  as  typical  of  the  necessity  of 
balancing  skilled  labor  and  unskilled  labor.  To  have  more 
unskilled  labor  than  can  be  used  effectively  with  the  limited 
supply  of  skilled  labor  is  quite  as  bad  as  to  have  more  people 
than  can  be  supported  on  the  land,  or  fewer  people  than  are 
necessary  to  Utilize  the  land.  To  have  more  manual  labor 
than  will  effectively  combine  with  mental  labor,  to  have  more 
mental  laborers  who  are  capable  of  doing  only  routine  work 
than  will  combine  effectively  with  those  mental  laborers  who 
possess  originality,  inventiveness,  and  the  power  of  leadership 
is  also  to  produce  a  bad  balance. 

Probably  the  most  important  of  all  problems  of  statesman- 
ship, and  at  the  same  time  one  of  the  most  difficult,  is  that 
of  balancing  up  the  population  so  that  no  particular  class  of 
labor  is  either  oversupplied  or  undersupplied  with  respect  to 
any  other  class.  One  method  of  preserving  the  balance  is  by 
education  and  vocational  guidance.  Training  men  for  the 
occupations  where  men  are  needed,  as  evidenced  by  the  high 
wages  and  salaries  paid,  is  one  of  the  quickest  and  most  effec- 
tive ways  of  preserving  the  balance.  Whenever  any  occupation 
is  so  undermanned  as  to  make  it  difficult  to  find  workers, 
wages  or  salaries  will  tend  to  rise.  This  increase  in  remunera- 
tion is  then  a  standing  invitation  to  young  men  to  prepare 
themselves  for  that  work,  and  a  properly  conducted  education 
system  is  a  standing  opportunity  to  young  people  to  prepare 
themselves  to  accept  the  invitation. 

Differential  rates  of  multiplication.  A  wholesome  moral  life 
would  also  be  a  powerful  agency  working  in  the  same  direction. 
Those  who  have  demonstrated  that  they  are  needed  by  the  fact 
that  they  can  fill  good  positions  for  which  there  is  a  demand, 
and  for  which  high  wages  and  salaries  are  offered,  are  the 
ones  who  ought  to  reproduce  their  kind  most  abundantly. 
Unfortunately,  in  most  modern  communities,  they  are  the  very 


1 88          PRINCIPLES  OF  POLITICAL  ECONOMY 

people  who  multiply  least  rapidly.  On  the  other  hand,  those 
who  have  demonstrated  that  they  are  more  or  less  superfluous 
because  they  can  do  only  a  kind  of  work  which  is  oversup- 
plied,  and  who  therefore  find  difficulty  in  getting  work  at  all, 
and  can  earn  only  low  wages  when  they  do  get  it,  ought, 
from  the  standpoint  of  a  balanced  population,  to  multiply  least 
rapidly.  Unfortunately  they  are  frequently  the  very  people 
who  multiply  most  rapidly.  This  differential  rate  of  multiplica- 
tion helps  to  perpetuate  a  badly  balanced  population  in  spite 
of  all  the  efforts  of  all  the  schools  toward  an  occupational 
redistribution  of  population  and  a  restoration  of  the  balance. 

Geographical  redistribution  of  population.  That  more  land 
is  better  for  a  growing  population  than  less  land  is  the  theory 
on  which  a  great  deal  of  the  history  of  the  world  has  been 
constructed.  The  migrations  of  peoples  in  search  of  more 
land  is  one  of  the  large  aspects  of  human  history.  There  could 
be  no  possible  object  in  seeking  more  land,  instead  of  remain- 
ing content  with  the  land  in  the  possession  of  the  people,  were 
it  not  for  the  fact  of  diminishing  returns.  Therefore  a  very 
discriminating  writer1  has  stated  the  opinion  that  the  law  of 
decreasing  returns  is  the  fundamental  fact  of  human  history. 
The  effort  of  a  growing  population  to  acquire  more  land  is, 
from  the  standpoint  of  the  present  chapter,  merely  an  effort  to 
restore  the  balance  between  factors  of  production.  In  any  given 
state  of  civilization  too  dense  a  population,  that  is,  too  much 
labor  and  too  little  land,  works  to  the  disadvantage  of  the 
people.  When  they  begin  to  perceive  that  they  would  be  better 
off  if  they  had  more  land,  nothing  except  the  strong  military 
guard  or  a  Chinese  wall  will  prevent  emigration. 

Migration  of  capital.  But  capital  follows  the  same  law  as 
population.  In  a  community  where  the  land  and  labor  are  not 
properly  balanced  up  with  an  adequate  supply  of  capital,  the 
perception  of  a  need  for  more  capital,  that  is,  tools  and 

1  Edward  Van  Dyke  Robinson,  "  War  and  Economics,"  Political  Science 
Quarterly,  Vol.  XV,  pp.  581-622. 


BALANCING  OF  FACTORS  OF  PRODUCTION     189 

equipment,  is  likely  to  be  pretty  clear  and  definite.  This  leads  to 
the  offer  of  high  rates  of  interest  as  an  inducement  to  capital 
to  migrate  from  other  communities  where  it  is  abundant  in  order 
to  supply  those  communities  where  it  is  scarce.  The  possibility 
of  using  each  and  every  unit  of  capital  advantageously  is  what 
enables  borrowers  to  pay  the  high  rate  of  interest.  The  scar- 
city of  capital  relatively  to  other  factors  is  what  creates  the 
opportunity  for  advantageous  use  of  capital.  The  formula, 
"  More  capital,  more  product ;  less  capital,  less  product,"  is  appre- 
ciated with  peculiar  vividness.  This  appreciation  leads  to  active 
bidding  for  capital,  and  this  to  the  offer  of  high  rates  of 
interest.  The  fortunate  individual  who  can  gain  possession 
of  an  additional  fund  of  capital,  being  able  to  increase  his 
product  considerably,  finds  it  economical  to  pay  a  high  rate  of 
interest  for  it.  If  he  owns  his  own  capital,  whereas  his  com- 
petitors in  production  lack  capital,  he  will  have  a  great  advan- 
tage over  them  and  will  therefore  secure  a  large  income. 
According  to  our  analysis  in  the  chapter  on  The  Source  of 
Interest,  this  additional  income  which  he  gets  from  the  use 
of  his  own  capital  is  interest  as  truly  as  the  income  which  he 
gets  from  lending  his  capital  to  someone  else. 


SECTION   B 
THE  PRODUCTIVE  INDUSTRIES 

The  chief  methods  by  which  the  productive  forces  are  made  to  work  for 

our  advantage 


191 


192 


CHAPTER    XVI 
THE  EXTRACTIVE  INDUSTRIES 

Ways  of  acquiring  wealth.  In  the  diagram  on  the  preced- 
ing page  the  ways  of  acquiring  wealth  are  divided  into  two 
main  classes,  the  uneconomical  and  the  economical.  From  the 
social  or  national  point  of  view  it  is  uneconomical  to  have 
men  acquiring  wealth  by  methods  which  do  not  add  to  the 
total  wealth  or  well-being  of  the  society  or  the  nation.  When 
one  man  gains  something  by  plundering,  swindling,  counter- 
feiting, or  monopolizing,  someone  else  loses  a  like  amount,  and 
nothing  is  added  to  the  total.  In  fact,  if  these  harmful  methods 
become  general,  it  is  likely  to  discourage  honest  industry  and 
actually  diminish  the  total  production  of  wealth.  Even  the 
neutral  methods  may  become  harmful  if  they  result  in  wasted 
lives ;  that  is,  if  they  enable  men  and  women  who  would  other- 
wise be  productive  and  useful  to  live  in  idleness  and  luxury. 
The  smaller  the  proportion  of  the  people  who  live  by  means  of 
the  uneconomical  methods,  the  more  prosperous  the  nation  is 
likely  to  become. 

By  the  economical  ways  of  acquiring  wealth  are  meant  all 
those  ways  by  which  an  individual  contributes  to  the  wealth  of 
the  whole  community  as  much  as  he  gets.  He  may  make  his 
contribution  by  laboring  either  to  produce  commodities  or  to 
render  direct  service  to  some  of  his  fellow  men.  In  either  case, 
where  he  gives  honest  service  for  honest  pay  he  is  enriching 
someone  else  in  proportion  as  he  is  himself  enriched.  A  nation 
in  which  this  rule  prevails  universally,  where  everyone  is  con- 
tributing to  the  well-being  of  someone  else  in  exact  proportion 
as  he  himself  prospers,  has  at  least  one  of  the  conditions  of 
general  prosperity.  If  each  one  is  capable  and  well  trained, 

193 


194          PRINCIPLES  OF  POLITICAL  ECONOMY 

so  that  he  can  give  efficient  service,  that  is,  if  he  contributes 
largely  to  the  prosperity  and  well-being  of  someone  else,  then 
everyone  is  prosperous,  which  is  the  same  as  saying  that  the 
nation  as  a  whole  is  prosperous. 

Economical  ways  of  getting  wealth.  The  economical  ways 
of  getting  a  living  are  subdivided  into  three  classes :  first,  the 
primary  industries  ;  second,  the  secondary  industries ;  and, 
third,  professional  and  personal  service.  The  primary  industries 
are  those  which  produce  commodities  directly  from  their  original 
and  natural  source,  —  which  take  material  as  nature  provides 
it  and  appropriate  it  to  some  human  use  or  change  it  from  a 
form  which  is  nonusable  to  a  form  which  is  either  usable  or 
one  stage  nearer  to  usableness.  For  example,  the  elements 
which  produce  plant  growth  are  not,  in  their  natural  state, 
available  for  human  use.  The  farming  industry  converts  these 
elements  into  something  which  is  either  usable,  as  in  the  case 
of  fruits  and  vegetables,  or  at  least  one  stage  on .  its  way  toward 
usableness,  as  in  the  case  of  grain  or  live  stock.  The  mining 
industry  brings  the  crude  ore,  which  is  not  usable,  into  a  condi- 
tion where  it  is  either  usable  or  at  least  one  stage  nearer  usability. 
The  secondary  industries  are  those  which  take  the  products 
of  the  primary  industries  which  are  in  need  of  further  modifi- 
cation and  carry  them  through  the  remaining  stages  on  their 
way  to  final  usability.  The  iron  ore,  for  example,  must  be 
worked  over  many  times  before  it  becomes  an  automobile  or 
the  blade  of  a  pocketknife.  The  coal  must  sometimes  be 
transported  long  distances  before  it  can  warm  our  houses.  The 
farmer's  grain,  besides  being  transported  long  distances  from 
places  where  there  is  a  surplus  to  other  places  where  there  is 
a  shortage,  must  also  be  stored  from  threshing  time  until  it  is 
needed  by  the  consumers ;  and  it  must  be  ground  into  flour 
and  baked  into  bread  or  manufactured  into  some  other  form 
of  food  before  it  is  ready  for  use. 

Personal  and  professional  services  include  all  lines  of  work 
which  do  not  directly  produce  salable  commodities.  Lawyers, 


THE  EXTRACTIVE  INDUSTRIES  195 

doctors,  preachers,  teachers,  actors,  barbers,  and  even  policemen 
and  congressmen,  besides  multitudes  of  others,  are  performing 
professional  and  personal  services.  Their  labor  has  sometimes 
been  called  unproductive  labor,  merely  on  the  ground  that  it  does 
not  produce  vendible  commodities.  Though  the  writers  who 
apply  that  term  to  them  do  not  mean  to  cast  any  reflection  upon 
them,  always  being  careful  to  state  that  unproductive  does  not 
mean  useless,  nevertheless  it  seems  better  to  avoid  the  use  of  a 
term  which  is  so  easily  misunderstood.  The  important  distinc- 
tion is  not  that  between  productive  and  unproductive  labor,  but 
between  the  economical  and  uneconomical  ways  of  acquiring 
wealth.  Even  though  the  labor  of  the  policeman  does  not  directly 
produce  a  commodity,  as  the  labor  of  a  shoemaker  does,  for 
example,  nevertheless  the  shoemaker  and  every  other  honest 
worker  is  helped  to  work  better  by  the  law  and  order  which 
a  good  police  system  helps  support.  They  are  also  helped  by 
the  physician,  the  teacher,  and  others  who  labor  in  the  field  of 
direct  professional  service.  There  is  an  ancient  story  of  some 
musicians  who  formed  a  part  of  a  captured  army.  They 
requested  that  they  be  set  free  by  their  captors,  on  the  ground 
that  they  had  not  taken  part  in  the  fighting.  The  captors 
replied,  "  By  your  music  you  inspired  others  to  fight ;  therefore 
you  must  be  treated  as  though  you  were  yourselves  fighters." 
By  a  similar  line  of  reasoning  it  could  be  said  that  if  musicians 
inspire  others  to  work,  they  are  themselves  workers  and  are 
contributing  their  part  toward  the  national  prosperity. 

The  primary  industries.  The  primary  industries  are  them- 
selves subdivided  into  two  classes,  the  extractive  and  the  ge- 
netic. Extractive  industries  are  those  which  merely  appropriate 
natural  objects,  without  any  attempt  to  replace  what  is  taken  or 
to  keep  up  and  increase  the  supply.  The  genetic  industries, 
which  might  almost  be  called  creative,  are  those  primary  indus- 
tries which  make  a  conscious  effort  to  replace  that  which  is 
taken,  and  to  increase  the  supply.  Thus,  hunting  wild  animals 
and  grazing  domesticated  animals  on  free  ranges  are  extractive, 


196          PRINCIPLES  OF  POLITICAL  ECONOMY 

whereas  tillage  and  stock  breeding  are  genetic.  Lumbering  or 
cutting  timber  in  a  natural  forest  is  extractive,  whereas  forestry, 
the  scientific  growing  of  timber,  is  genetic.  Fishing  in  unstocked 
waters  is  extractive,  whereas  fish  culture  is  genetic.  Mining  is 
extractive.  There  does  not  seem  to  be  any  genetic  industry 
which  bears  the  same  relation  to  it  as  fish  culture  bears  to 
fishing,  or  forestry  to  lumbering. 

Hunting.  Of  all  industries  hunting  is  the  most  primitive. 
It  was  sometimes  combined  with  fishing  as  a  means  of  sub- 
sistence. It  usually  included  the  search  for  edible  fruits,  nuts, 
and  vegetables,  as  well  as  the  killing  of  animals ;  and  it  some- 
times even  degenerated  into  a  man  hunt ;  that  is,  the  hunting, 
killing,  and  robbing  of  men.  Where  animals  constituted  the 
most  abundant  source  of  food,  primitive  men  quite  naturally 
hunted  animals.  Where  fruits,  nuts,  and  edible  roots  were 
abundant,  it  was  not  uncommon  for  the  search  for  these  foods 
to  become  the  chief  occupation.  The  hunting  of  animals  led 
naturally  to  domestication  and  herding,  and  the  search  for 
fruits  and  herbs  led  quite  as  naturally  to  horticulture  as  the  next 
stage  in  industrial  development.  Our  own  primitive  ancestors 
seem  to  have  been  hunters,  and  later  herdsmen,  before  they  took 
up  agriculture.  The  North  American  Indians  lived  mainly  by 
hunting  animals,  though  they  had  taken  to  the  cultivation, of 
crops  on  a  small  scale.  They  seem  not  to  have  domesticated 
any  animal  except  the  dog,  before  the  coming  of  the  white 
man.  This  direct  passage  from  hunting  to  tillage,  without  an 
intermediate  stage  of  herding,  is  considered  somewhat  excep- 
tional. The  ancient  Peruvians  had  domesticated  the  llama  and 
the  alpaca.  The  ancient  Mexicans  had  become  horticulturists 
apparently  without  having  been  herdsmen  at  all ;  their  primi- 
tive hunting  seems  to  have  consisted  mainly  in  searching  for 
fruits  and  herbs  rather  than  for  animals. 

Hunting,  which  includes  trapping,  has  played  an  important 
part,  and  still  plays  an  appreciable  part,  in  our  national  economy. 
The  abundance  of  game  on  our  western  frontiers,  when  we  had 


THE  EXTRACTIVE  INDUSTRIES  197 

a  frontier,  was  an  important  source  of  food  for  the  advance 
army  of  settlers.  The  emigrants  who  crossed  the  great  plains 
in  the  early  settlement  of  the  Pacific  coast  also  benefited  to  a 
certain  extent  from  the  herds  of  buffalo,  deer,  elk,  and  antelope 
which  at  one  time  abounded.  More  important,  however,  was  the 
regular  business  of  trapping  fur-bearing  animals  and  of  trading 
with  the  Indians  for  the  skins  and  furs  which  they  collected. 
A  great  deal  of  the  history  of  our  frontier,  beginning  with  the 
first  settlements  on  the  Atlantic  coast  and  continuing  across 
the  continent,  has  been  a  history  of  the  fur  trade.  Relatively 
to  her  size  and  her  other  industries,  the  fur  trade  has  been  even 
more  important  in  Canada  than  in  the  United  States.  Great 
companies  such  as  the  Hudson  Bay  Company  and  the  North- 
west Company  of  Merchants  of  Canada  were  organized,  which, 
especially  during  the  eighteenth  and  early  nineteenth  century, 
swayed  the  destinies  of  that  country  and  parts  of  our  own 
Northwest.  They  maintained  numerous  trading  posts  and  em- 
ployed thousands  of  men,  who  explored  every  nook  and  corner 
of  the  territory  over  which  they  operated.  Similar  though 
smaller  companies  were  formed  within  the  United  States,  to 
trade  with  our  own  Indians.  Many  of  our  Western  pioneers, 
guides,  and  scouts,  of  whom  Kit  Carson  was  the  most  famous, 
began  their  careers  as  hunters  and  trappers  for  these  various 
companies.  The  story  of  their  adventures  adds  a  romantic 
element  to  the  early  history  of  our  Far  West,  but  they  were 
making  their  living  by  gathering  furs  to  supply  the  demands 
of  commerce. 

After  the  building  of  the  transcontinental  railroads  across 
the  great  Western  plains  a  rich  harvest  of  buffalo  skins  was 
reaped  for  a  few  brief  years.  The  lamentable  result  was  that 
the  buffaloes,  or  bison,  as  they  are  more  properly  named,  which 
had  roamed  in  countless  numbers  over  those  plains,  were 
almost  exterminated  in  the  two  decades  from  1870  to  1890. 
It  is  doubtful  if  such  a  slaughter  of  noble  animals  ever  took 
place  before  in  the  history  of  the  world. 


198          PRINCIPLES  OF  POLITICAL  ECONOMY 

As  the  country  has  become  settled,  fur-bearing  animals,  as  well 
as  other  wild  animals  whose  skins  form  articles  of  commerce, 
have  tended  to  grow  scarcer,  though  no  such  wholesale  destruc- 
tion has  overtaken  any  of  the  others  (except  the  beaver)  as  that 
which  overtook  the  buffalo.  Most  of  them  are  small  enough  to 
find  cover  and  sustenance  for  small  numbers  in  the  woods  and 
fields  of  settled  communities.  Therefore  hunting  and  trapping 
still  supply  a  small  fraction  of  our  national  income.  The  most 
valuable  of  all  our  inland  fur-bearing  animals,  the  beaver,  has 
almost  disappeared,  along  with  the  buffalo ;  but  minks,  musk- 
rats,  raccoons,  opossums,  skunks,  foxes,  and  coyotes  are  still 
found  in  small  numbers.  The  subarctic  regions  of  Northern 
Canada  and  Alaska  still  yield  considerable  harvests  of  furs,  while 
the  seals  which  congregate  in  the  Bering  Sea,  if  adequately 
protected,  may  prove  a  valuable  national  asset. 

Fishing.  While  hunting,  as  a  source  of  national  wealth,  tends 
to  decline  in  importance  as  the  country  develops,  fishing  seems 
to  increase.  One  reason  for  the  decline  of  hunting  is  the  sim- 
ple fact  that  land  becomes  too  valuable  for  other  purposes  to 
be  allowed  to  remain  in  its  wild  state  as  a  refuge  or  feeding 
ground  for  wild  animals.  When  it  is  turned  to  other  purposes, 
most  of  them  must  of  necessity  disappear.  The  same  is  appar- 
ently true  of  many  inland  streams  which  once  furnished  small 
quantities  of  fish.  But  the  larger  lakes,  and  especially  the  oceans, 
furnish  an  almost  inexhaustible  supply  of  excellent  food.  As 
population  and  the  demand  for  food  increase,  the  harvest  of 
the  sea  assumes  a  more  and  more  important  part  in  our  national 
economy.  According  to  the  last  estimate  of  the  Federal  Census 
there  were  in  the  United  States,  including  Alaska,  7347  vessels 
engaged  in  the  fishing  industry;  166,343  persons  were  em- 
ployed, and  the  total  value  of  the  product  was  $75,029,973. 
The  total  value  of  the  fisheries  of  the  world  is  estimated  at 
something  over  $480,0x30,000. 

We  have  as  yet  scarcely  begun  to  realize  the  possibilities  of 
this  harvest  of  the  sea.  Practically  every  fish  which  lives  in 


THE  EXTRACTIVE  INDUSTRIES  199 

these  northern  waters  is  good  for  food  if  properly  prepared. 
Every  decade  we  are  discovering  that  some  variety  which  has 
formerly  been  rejected  is  quite  as  good  as  any  that  we  have 
hitherto  prized.  Thus  far  we  have  chosen  only  a  few  of  the 
many  varieties  with  which  the  sea  abounds. 

Pasturage.  It  would  be  impossible  to  estimate  how  much 
the  civilized  races  of  the  north  temperate  zone  owe  to  such 
domestic  animals  as  the  horse,  the  ass,  the  cow,  the  sheep, 
the  goat,  and  the  pig.  All  these  animals  have,  at  one  time  or 
another,  furnished  food  for  man.  The  horse,  the  ox,  and 
the  ass  have  furnished  that  which  has  played  almost  as  im- 
portant a  part  as  food  in  man's  conquest  of  nature,  —  namely, 
power.  Before  steam  and  electricity  had  been  harnessed, 
or  water  power  developed,  these  animals  were  almost  the 
only  sources  of  power  besides  human  muscles.  The  skins 
of  all  were  and  are  still  utilized,  there  being  no  very  good 
substitute  for  leather  even  to  this  day.  The  cow  and  the 
goat  have  furnished,  and  still  furnish,  milk,  one  of  our  most 
important  articles  of  diet.  The  wool  of  the  sheep  is  even  now, 
next  to  cotton,  the  most  important  material  for  the  manufacture 
of  clothing. 

In  their  native  state  all  these  animals  except  the  pig  lived 
almost  exclusively  upon  grass,  either  green  or  dried  in  the 
form  of  hay,  and  they  still  depend  mainly  upon  it.  Even  the 
pig,  with  his  omnivorous  appetite  and  his  accommodating 
stomach,  will  thrive  on  grass  as  his  chief  article  of  diet,  though 
he  needs  some  more  concentrated  food  in  addition  if  he  is  to 
make  his  best  growth.  Grass  and  grazing  have  therefore  played 
a  very  important  part  in  the  economic  life  of  that  branch  of  the 
human  race  from  which  we  are  derived.  Our  ancestors  were 
already  herdsmen  before  they  emerged  from  prehistoric  dark- 
ness. All  the  animals  now  under  domestication,  and  all  the 
fowls  except  the  turkey,  were  domesticated  so  long  ago  that 
we  have  no  record  as  to  where  or  when  it  occurred.  It  may 
give  us  a  new  respect  for  those  prehistoric  ancestors  of  ours 


200          PRINCIPLES  OF  POLITICAL  ECONOMY 

when  we  reflect  that  we  have  never  succeeded  in  thoroughly 
domesticating  any  animal  since  we  have  had  a  history,  though 
we  may  soon  succeed  with  the  zebra.  There  has  never  been 
a  period,  of  which  we  have  any  record,  from  the  earliest 
times  to  the  present,  when  our  branch  of  the  human  race 
did  not  depend  for  its  subsistence  largely  upon  the  grazing 
animals.  During  the  greater  part  of  our  historic  life  our 
domestic  animals  grazed  on  wild  or  native  grasses.  Feeding 
them  upon  cultivated  grasses  and  grains  will  be  discussed  under 
Agriculture. 

Grazing  on  our  western  frontier.  From  the  earliest  settle- 
ments in  the  territory  now  occupied  by  the  United  States, 
grazing  has  been  an  important  industry.  Following  closely  in 
the  wake  of  the  hunters,  trappers,  and  fur  traders,  and  in  ad- 
vance of  the  farmers,  have  gone  the  herdsmen.  The  wild  grasses 
furnished  a  ready  source  of  income  to  the  man  who  possessed 
animals  capable  of  turning  them  into  salable  products.  The 
frontier  settlements  in  colonial  New  England  possessed  large 
herds  of  cattle,  and  down  to  1820  beef  was  one  of  the  principal 
exports.  Hogs  ran  wild  in  the  woods,  and,  living  as  they  did 
on  roots  and  mast,  they  furnished  an  abundant  supply  of  meat. 
Horses  were  exported  in  considerable  numbers.  After  the 
danger  from  wolves  was  reduced,  sheep  were  grown  in  large 
numbers.  In  Virginia  and  the  Carolinas  grazing  developed 
even  more  rapidly.  The  cattlemen  had  their  brands  registered, 
they  organized  round-ups,  and  they  carried  on  the  business 
very  much  as  it  was  carried  on  in  the  Far  West  in  the  seventies 
and  eighties  of  the  last  century. 

The  herdsmen  continued  to  move  westward  in  advance 
of  the  more  permanent  settlements,  but  the  farmers  who 
plowed  the  land  and  harvested  crops  kept  many  animals  to 
graze  upon  the  native  grasses  which  still  flourished  upon  the 
unbroken  lands.  Before  the  building  of  the  railroads  great 
herds  of  cattle,  sheep,  and  hogs  were  driven  sometimes  hundreds 
of  miles  to  market  in  the  cities  of  the  Atlantic  coast.  A  hog 


THE  EXTRACTIVE  INDUSTRIES  201 

which  could  not  transport  itself  to  market  was  not  of  much 
value  ;  consequently  not  much  attention  was  given  to  the  breed- 
ing of  the  short-legged,  barrel-shaped  hog  of  the  present  day. 
The  cattle,  likewise,  were  built  more  for  traveling  than  for 
meat.  The  oxen  of  that  period,  which  were  preferred  to  horses 
for  heavy  farm  work,  were  well  adapted  to  that  purpose. 

When  the  advance  waves  of  settlement  reached  the  great 
prairies  of  the  West,  the  grazing  industry  entered  a  new  phase. 
Those  natural  meadows  of  vast  extent  furnished  a  much  more 
abundant  pasturage  than  had  the  great  forest  which  extended 
almost  unbroken  from  the  Atlantic  coast  to  western  Ohio  in 
the  central  part  of  the  country,  and  to  the  Mississippi  River 
and  beyond  on  the  north  and  south.  Goats  and  asses  had 
never  figured  largely  among  the  domestic  animals  of  this  coun- 
try, but  horses,  cattle,  sheep,  and  hogs  had  multiplied  rapidly. 
On  these  Western  prairies,  the  former  home  of  countless  herds 
of  buffalo,  deer,  elk,  and  antelope,  all  of  which  were  grazing 
animals,  cattle  and  sheep  were  very  economically  produced, 
and  would  have  been  enormously  profitable  had  not  the  prices 
of  beef,  mutton,  and  wool  fallen  so  low  as  barely  to  cover  the 
low  cost  of  production.  Dwellers  in  Eastern  cities  enjoyed 
abnormally  cheap  meat  and  continued  to  do  so  until  the  very 
end  of  the  nineteenth  century  ;  since  that  time  meat  prices 
have  been  gradually  approaching  a  normal  level  again. 

The  Texas  cattle  trail.  After  the  close  of  the  Civil  War 
the  grazing  industry  entered  still  another  phase.  Vast  herds  of 
cattle,  brought  by  the  early  Spanish  settlers,  had  long  roamed 
the  plains  of  Mexico  and  Texas.  After  Texas  entered  the 
United  States,  the  grazing  industry  developed  rapidly  under 
the  energetic  management  of  American  cattlemen.  Texas  cattle 
began  to  enter  the  markets  of  the  North  and  East.  The  Civil 
War  put  a  stop  to  this  for  a  time.  At  the  close  of  the  war  the 
Texas  ranges  were  swarming  with  cattle.  They  soon  began  to 
move  northward  in  search  of  more  pasture  as  well  as  of  better 
markets.  This  drift  northward  followed,  in  the  main,  the  western 


202 


PRINCIPLES  OF  POLITICAL  ECONOMY 


edge  of  the  settlements,  and  the  route  came  to  be  known  as 
the  Texas  Cattle  Trail.  As  settlements  extended  westward  the 
trail  necessarily  moved  westward  also. 

By  this  time  the  northern  ranges  were  all  west  of  the 
Mississippi  River  and  were  soon  confined  to  the  Great  Plains. 
Farming  on  these  plains  was  slow  in  development,  because  of 
the  insufficient  rainfall.  Therefore  the  tide  of  westward  settle- 
ment was  so  retarded  as  to  permit  a  considerable  develop- 
ment of  what  came  to  be  called  cattle  ranching.  The  grazing 


Distribution  of  Sheep  in  the  United  States 

industry  was  given  more  time  in  which  to  develop  systematically. 
It  was  less  transitory  than  it  had  been  on  the  rapidly  moving 
frontier  of  earlier  times.  It  still  survives  over  considerable 
areas  of  the  arid  West,  that  is,  west  of  the  one  hundred  and 
second  meridian,  though  it  is  gradually  becoming  more  restricted 
through  the  gradual  settlement  of  the  better  lands  by  farmers. 
Nearly  half  the  beef  cattle  and  more  than  half  the  sheep 
of  the  United  States  are  grown  on  these  ranges,  though  many 
of  the  animals  raised  there  are  afterwards  fattened  in  what 
is  known  as  the  corn  belt ;  that  is,  the  country  in  which 


THE  EXTRACTIVE  INDUSTRIES 


203 


Indian  corn  is  the  leading  crop.  This  belt  extends  from  Ohio 
westward  beyond  the  Missouri  River,  roughly  to  the  ninety- 
eighth  meridian.  Considerable  numbers  of  horses  are  also 
grown  on  these  ranges,  but  most  of  them  are  grown  on  the 
farms  farther  east.  Goats  also  have  increased  en  some  of  the 
southwestern  ranges,  though  they  have  never  played  a  very 
important  role  in  our  national  economy. 

Lumbering.    Next  to  grass  the  most  valuable  natural  product 
of  the  soil  is  timber.    It  might  occupy  first  place  if  the  value  of 


Distribution  of  Cattle  in  the  United  States 

the  native  timber  standing  at  a  given  time  were  compared  with 
the  value  of  the  native  grass  standing  at  the  same  time.  The 
proper  basis  of  comparison,  however,  is  the  annual  growth  of 
the  two  products  on  soil  equally  good  for  either.  Though  this 
is  sometimes  called  the  age  of  steel,  wood  is  still  an  important 
and  almost  indispensable  material. 

The  first  settlers  on  our  Atlantic  seaboard  found  a  dense 
and  apparently  limitless  forest  extending  from  the  coast  west- 
ward. It  was  not  until  well  into  the  nineteenth  century  that 
the  advance  guard  of  the  army  of  western  migration  began  to 


204          PRINCIPLES  OF  POLITICAL  ECONOMY 

emerge  from  this  forest  onto  the  great  prairies  of  the  West. 
Timber  was  so  abundant  as  scarcely  to  be  considered  an 
economic  good.  Certainly  the  settlers  had  little  occasion  to 
economize  it.  The  best  of  it  they  used  rather  lavishly  ;  the  rest 
they  destroyed  in  order  that  they  might  use  the  land  for  things 
which  they  needed  more  than  they  needed  timber.  Along  the 
northern  tier  of  states  the  great  forest  extended  as  far  west  as 
Minnesota.  In  the  middle  strip  the  prairies  began  in  parts  of 
northern  Indiana.  Farther  south  the  forest  followed  the  Ohio 
valley  to  the  Mississippi,  and  extended  beyond  through  central 
and  southern  Missouri,  Arkansas,  and  Louisiana  into  portions  of 
eastern  Kansas,  Oklahoma,  and  Texas.  Other  forests  were  found 
in  the  high  mountains  of  the  West,  but  the  finest  of  all  were 
found  in  the  region  of  Puget  Sound  in  our  extreme  Northwest. 
After  the  first  onslaught  of  the  settlers,  who  were  bent  on 
getting  rid  of  the  timber  in  order  to  clear  the  land  for  cultiva- 
tion, lumbering  became  a  regular  business  in  every  part  of  our 
forested  area.  Its  greatest  development  was  in  lands  which 
were  not  the  most  valuable  for  agricultural  purposes.  Along 
our  northern  border,  where  the  climate  was  somewhat  severe, 
and  where  the  soil  was  rather  light  and  sandy,  the  timber  was 
not  destroyed  in  order  to  clear  the  land,  because  better  lands 
were  available  farther  south.  When  the  timber  of  this  northern 
strip  came  to  have  a  commercial  value,  it  became  the  scene  of 
lumbering  on  a  large  scale.  Large  companies  were  formed, 
thousands  of  men  were  employed,  and  great  fortunes  were 
made.  Lumbering  in  this  region,  particularly  along  the  Great 
Lakes  and  the  upper  tributaries  of  the  Mississippi  River,  that 
is,  in  the  states  of  Michigan,  Wisconsin,  and  Minnesota,  where 
water  transportation  was  cheap,  developed  rapidly  during  the 
latter  half  of  the  nineteenth  century  and  then  declined  rapidly. 
A  similar  development  took  place  in  the  southern  states. 
Here  the  greatest  activity  was  along  the  southern  coast,  just  out- 
side of  the  cotton  belt ;  that  is,  on  land  which  was  not  cleared 
primarily  for  the  purpose  of  growing  cotton,  but  where  the 


THE  EXTRACTIVE  INDUSTRIES 


205 


timber  was  left  standing  until  it  had  acquired  a  commercial  value 
through  the  increased  demand  and  the  improvement  of  trans- 
portation facilities.  The  most  valuable  timber  tree  of  this  belt  was 
the  yellow  pine,  as  the  white  pine  had  been  of  the  northern  belt. 

Lumbering,  however,  has  by  no  means  been  confined  to 
these  two  belts.  Much  timber  of  various  kinds  and  qualities 
is  cut  every  year  in  every  state  in  the  Union,  though  naturally 
it  is  less  in  the  prairie  states  than  in  the  states  which  were 
originally  forested.  In  the  older  states  some  of  the  timber 
lands  have  been  cut  over  several  times  since  the  first  settle- 
ment and  will  doubtless  yield  many  harvests  in  the  future. 
But  the  greater  part  of  our  original  virgin  forest  has  been 
destroyed.  Such  cut-over  lands  as  are  not  suitable  for  other 
purposes,  or  not  needed  immediately  for  agriculture,  will  un- 
doubtedly be  allowed  to  reforest  themselves  or  be  reforested 
by  scientific  methods,  but  it  is  safe  to  say  that  the  days  of 
cheap  and  abundant  timber  in  this  country  are  past.  From  this 
time  forward  careful  conservation  will  be  necessary  in  order  to 
safeguard  an  adequate  supply. 

The  magnitude  of  the  lumber  industry  of  the  United  States 
for  the  years  1899—1913  is  shown  by  the  following  table:1 

NUMBER  OF  ACTIVE   MILLS   REPORTING  AND   QUANTITY  OF 
LUMBER,  1899-1913 


NUMBER  OF 

LUMBER 

NUMBER  OF 

LUMBER 

YEAR 

ACTIVE  MILLS 

(QUANTITY 

YEAR 

ACTIVE  MILLS 

(QUANTITY 

REPORTING 

M  FEET  B.M.) 

REPORTING 

M  FEET  B.M.) 

1913 

2i,6682 

38,387,009 

1908 

3L23I 

33,224,369 

1912 

29,648 

39,158,414 

1907 

28,850 

40,256,154 

1911 

28,107 

37,003,207 

1906 

22,393 

37.550.736 

1910 

3L934 

40,018,282 

1904 

18,277 

34,i35.!39 

1909 

48,112 

44,509,761 

1899 

3L833 

35,084,166 

1  Bulletin  No.  232,  United  States  Department  of  Agriculture.    Washington, 


2  In  1913  the  number  of  active  mills  included  only  those  cutting  lumber, 
while  the  figures  for  the  other  years  include  mills  cutting  laths  and  shingles  as 
well  as  lumber. 


206          PRINCIPLES  OF  POLITICAL  ECONOMY 

In  addition,  much  timber  is  cut  for  local  use  on  farms,  both 
for  firewood  and  for  mechanical  purposes. 

Mining.  The  greatest  of  all  our  extractive  industries  is 
mining.  Within  the  boundaries  of  the  United  States  is*  found 
a  wealth  and  variety  of  minerals  such  as  no  other  country  is 
known  to  possess,  though  no  one  knows  what  new  discoveries 
may  yet  be  made  in  this  and  other  lands. 

Notable  among  our  mineral  products  are  the  following. 
The  values  given  are  for  the  year  1915. 

f  Bituminous $502,037,688 

\Anthracite .        184,653,498 

[Ore      ....  101,288,984 

IrorH 

I  Pig      .......     ,;    ,.  :,     .     .       401,409,604 

Copper ,  .     .     .     .  242,902,000 

Petroleum 1 79,462,890 

Natural  gas 101,312,381 

Gold 101,035,700 

Silver,  lead,  zinc,  aluminum,  cement,  building  stone,  lime, 
and  salt  are  also  valuable  products,  besides  many  others  of  less 
value.  Our  total  mineral  production  for  the  year  1915  aggre- 
gated more  than  two  and  a  third  billions  of  dollars. 

Since  minerals  are  not  reproduced  or  replaced  when  once 
extracted  from  the  earth,  it  is  only  a  question  of  time  before 
all  of  our  rich  deposits  will  be  exhausted.  In  some  cases  the 
deposits  are  so  enormous  as  to  remove  the  time  of  their  ex- 
haustion so  far  into  the  future  that  it  is  difficult  for  us  to  realize 
that  it  is  coming.  Authorities  agree  that  our  coal  deposits  will 
last  for  many  hundreds  of  years,  some  say  many  thousands  of 
years.  A  thousand  years  seems  a  long  time  to  an  individual, 
but  it  is  not  so  very  long  in  the  life  of  a  nation.  If,  however, 
we  have  enough  coal  to  last,  let  us  say,  for  only  a  thousand 
years,  it  is  a  difficult  question  to  decide  to  what  extent  that 
should  give  us  concern  for  the  future  welfare  of  our  country. 
It  is  easy  to  laugh  and  say  that  it  need  not  concern  us,  for 
we  shall  not  be  here  to  suffer  inconvenience.  It  is  also  easy 


THE  EXTRACTIVE  INDUSTRIES  207 

to  become  too  much  alarmed  ;  with  the  progress  of  invention 
we  may  find  other  sources  of  heat  and  power  before  our  coal 
is  gone.  Probably  our  best  policy  is  merely  to  avoid  unreason- 
able waste  or  destruction  of  mineral  resources,  and  then  leave 
future  generations  to  work  out  their  own  problems.  Wisdom 
will  not  die  with  us  of  the  present  generation. 

Instability  of  the  extractive  industries.  All  our  extractive 
industries  have  not  only  added  greatly  to  our  material  wealth  ; 
they  have  likewise  given  rise  to  picturesque  but  somewhat  un- 
stable phases  of  our  social  life.  The  early  hunters  and  trappers 
were  a  hardy,  adventurous  race,  whose  deeds  and  prowess 
have  become  a  part  of  our  national  history.  Our  herdsmen 
likewise,  especially  those  who  developed  the  cattle  business  on 
the  Great  Plains,  supplied  an  element  of  romance  and  adven- 
ture which  still  appeals  to  the  imagination  of  our  people.  Our 
hardy  fishermen  and  whalers  have  given  splendid  examples  of 
the  courage  and  strenuosity  which  can  wrest  a  living  from  the 
unconquerable  ocean.  Our  lumber  camps  and  our  mining 
camps  have  attracted  adventurous  and  unstable  characters  from 
the  ends  of  the  earth,  and  furnished  much  excellent  material 
for  the  story-writers.  But  instability  is  a  characteristic  of  these 
industries,  and  consequently  of  the  life  which  grew  up  around 
them.  Stability  can  only  be  supplied  to  our  national  life  by 
industries  which  are  themselves  self-perpetuating.  The  genetic 
industries  must  supply  that  need. 


CHAPTER   XVII 
THE  GENETIC  INDUSTRIES 

What  are  the  genetic  industries  ?  By  the  genetic  industries 
are  meant  those  in  which  men  make  conscious  and  systematic 
efforts  to  direct  the  biological  processes  of  reproduction  so  as 
to  increase  the  supply  of  desirable  plants  and  animals.  The 
greatest  of  these  is  agriculture,  which  includes  both  the  cultiva- 
tion of  plants  and  the  breeding  of  animals.  Forestry  and  fish 
culture  are  also  included  under  the  head  of  genetic  industries. 
Agriculture,  however,  is  sometimes  carried  on  in  such  a  slip- 
shod manner  as  scarcely  to  deserve  to  be  classed  as  a  genetic 
industry.  When  farmers  make  no  effort  to  preserve  the  fertility 
of  their  soil,  but  exhaust  it  by  wasteful  methods  of  tillage  and 
by  reckless  overcropping,  and  then  move  on  to  new  and  unex- 
hausted areas,  their  business  is  sometimes  called  mining  the 
soil.  A  genuinely  genetic  type  of  agriculture  can  endure  and 
even  improve  for  indefinite  periods  of  time  on  the  same  soil ; 
that  is,  it  not  only  preserves  but  improves  the  fertility  of  the 
soil,  generation  after  generation,  for  hundreds  and  thousands 
of  years.  It  thus  makes  possible  a  stable,  an  enduring,  and  an 
expanding  civilization  such  as  could  not  be  supported  exclu- 
sively by  any  of  the  extractive  industries. 

Demand  of  all  outdoor  industries  for  space.  All  of  those 
industries  which  appropriate  or  increase  the  products  of  the 
soil,  such  as  hunting,  grazing,  lumbering,  forestry,  and  farm- 
ing, have  one  characteristic  in  common.  They  all  require  a 
great  deal  of  space  as  compared  with  mining  and  the  second- 
ary industries,  such  as  manufacturing  and  merchandizing.  So 
great  is  this  demand  for  space  on  the  part  of  those  industries 
which  gather  in  or  develop  the  products  of  the  soil,  that  those 

208 


THE  GENETIC  INDUSTRIES  209 

who  engage  in  them  must  of  necessity  spread  themselves  over 
wide  areas  in  proportion  to  their  population.  They  are  com- 
pelled by  the  nature  of  their  industries  to  live  in  scattered 
homes  or  in  small  villages  located  far  apart.  They  are  there- 
fore called  "rural,"  that  is,  "field,"  or  "open  space,"  indus- 
tries, and  those  who  engage  in  them  are  called  "  rural,"  "  field," 
and  "  open  space  "  people.  Living  so  far  apart,  with  plenty  of 
room,  in  close  contact  with  nature  but  in  little  contact  with 
other  men  because  of  the  distances  between  them,  produces 
a  profound  reaction  upon  their  lives  and  characters.  Perhaps 
it  would  be  more  accurate  to  say  that  those  who  engage  in  the 
indoor  industries  are  so  cramped  for  space,  and  have  so  few 
contacts  with  nature  and  so  many  contacts  with  one  another, 
that  a  profound  and  artificial  change  is  produced  in  their  lives. 
By  the  indoor  industries  are  meant  all  those  which,  in  contrast 
to  the  field  industries,  require  so  little  space  that  they  can  be 
walled  in  and  roofed  over.  It  is  sometimes  difficult  for  indoor 
and  outdoor  people  to  understand  one  another. 

We  have  seen  in  the  last  chapter  that  the  utilization  of  the 
soil,  not  only  on  our  own  frontier  but  also  in  the  development 
of  civilized  life  among  our  remote  ancestors,  passed  through 
several  distinct  stages,  such  as  the  hunting  stage,  the  grazing 
stage,  and  the  agricultural  stage.  These  are  progressive  stages 
in  the  economizing  of  space.  It  takes  a  great  deal  more  terri- 
tory to  support  a  given  population  by  hunting  than  by  grazing, 
and  by  grazing  than  by  agriculture.  When  game  grew  scarce, 
or  when  population  increased,  those  who  had  the  wisdom  to 
make  the  change  were  forced  into  grazing,  and  again  into 
tillage,  in  order  to  increase  their  means  of  subsistence.  What 
an  uneconomical  use  of  land  hunting  was  may  be  inferred 
from  the  fact  that  there  were  never,  according  to  the  best  author- 
ities, more  than  one  million  Indians  within  the  boundaries 
of  the  present  United  States.  This  territory  now  supports 
approximately  a  hundred  times  that  number  of  people,  and  sup- 
ports them  more  comfortably  than  the  Indians  were  supported. 


210          PRINCIPLES  OF  POLITICAL  ECONOMY 

Each  Indian  tribe  was  forced  to  guard  its  hunting  grounds, 
lest  they  be  invaded  by  hunters  from  other  tribes  and  the 
source  of  its  subsistence  cut  off. 

Tillage.  Tillage  consists  essentially  of  three  processes  :  first, 
preparing  a  good  seed  bed,  in  which  plants  can  grow  more 
vigorously  than  in  natural,  or  unprepared,  soil ;  second,  planting 
in  this  prepared  seed  bed  the  seeds  of  such  plants  as  are  deemed 
most  useful  or  desirable  ;  and,  third,  destroying  all  other  plants, 
commonly  called  weeds,  which  may  start  to  grow  in  the  seed 
bed  in  competition  with  the  plants  whose  seeds  were  planted. 

Scientific  agriculture.  While  tillage  consists  essentially  of 
these  three  processes,  scientific  agriculture  includes  many  things 
besides.  We  need  to  be  on  our  guard,  however,  against  a 
pedantic  use  of  the  word  scientific  as  applied  to  agriculture. 
Scientific  agriculture  is  nothing  more  nor  less  than  the  most 
economical  and  effective  use  of  all  the  factors  of  agricultural 
production.  Specifically  it  consists  mainly,  though  not  exclu- 
sively, in  economizing,  first,  the  plant  food  in  the  soil ;  second, 
space  ;  third,  labor ;  and,  fourth,  capital  or  equipment.  Econo- 
mizing plant  food  means  getting  as  large  a  product  as  possible 
without  depleting  the  supply  of  plant  food.  Economizing  space 
means  getting  as  large  a  product  as  possible  from  a  given  area  ; 
that  is,  as  large  a  product  per  acre  as  possible.  Economizing 
labor  means  getting  as  large  a  product  per  unit  of  labor,  or 
per  man,  as  possible.  Economizing  capital  or  equipment  means 
getting  as  large  a  product  per  unit  of  capital  or  equipment 
as  possible. 

Excessive  economy  of  any  one  of  these  factors  always  involves 
a  certain  amount  of  waste  with  respect  to  some  of  the  others. 
For  example,  it  is  quite  possible  to  economize  space  to  such  an 
extent  as  to  exhaust  plant  food,  and  vice  versa.  That  is  to  say, 
a  farmer  may  try  for  a  period  of  years  to  get  so  much  from 
each  acre  as  eventually  to  deplete  the  fertility  of  his  soil.  By  a 
judicious  rotation  of  crops,  and  the  keeping  of  live  stock,  he 
may  preserve  the  fertility  of  his  soil  for  indefinite  periods  of 


211 

time,  but  this  may  not  give  him  the  maximum  product  per  acre 
in  the  present.  If  there  is  one  crop  that  yields  better  than 
any  other,  a  short-sighted  farmer  is  tempted  to  grow  that 
single  crop,  since  it  would  give  him  a  larger  product  per  acre ; 
but  such  continuous  cropping  tends  to  exhaust  his  soil.  Rotat- 
ing tends  to  preserve  the  fertility  of  the  soil,  but  gives  less  per 
acre  in  the  present ;  this  frequently  means  growing  some  crops 
which  are  not  so  profitable  in  the  immediate  present  as  the 
main  crop. 

The  law  of  diminishing  returns.  A  similar  conflict  arises 
between  the  economy  of  space  and  the  economy  of  labor.  It 
is  possible  to  try  to  grow  so  much  per  acre  as  to  reduce  the 
product  per  man  or  per  unit  of  labor.  It  is  this  phase  of  the 
question  of  economy  that  is  commonly  known  as  the  law  of 
diminishing  returns  from  land.  This  law  is  simply  that,  after 
a  certain  amount  of  labor  with  the  appropriate  tools  has  been 
applied  to  the  cultivation  of  a  given  crop  on  a  given  piece  of 
land,  further  applications  of  labor  do  not  yield  proportional 
returns.  They  may  increase  the  crop  slightly,  thus  increasing 
the  yield  per  acre,  but  they  will  not  increase  the  crop  in  pro- 
portion as  the  labor  is  increased.  The  result  is  a  decrease  in 
proportion  to  the  number  of  units  of  labor.1 

This  principle  may  be  illustrated  by  means  of  the  following 
table,  which  purports  to  show  how  much  corn,  in  a  hypo- 
thetical case,  could  be  produced  upon  a  ten-acre  field  by  using 
different  quantities  of  labor  and  tools,  the  quantities  being 
expressed  in  terms  of  days'  labor  of  a  man  and  team  with 
appropriate  tools.  The  ratio  between  the  product  and  the 
labor  is  shown  in  the  third  column,  which  states  the  number 
of  bushels  produced  per  day's  labor. 

On  a  field  such  as  we  have  assumed,  it  would  be  possible,  by 
using  fifty  days'  labor,  to  get  sixty-five  bushels  per  acre,  which 
would  be  more  economical  of  space  than  to  put  twenty-five 

1  See  the  author's  chapter  on  Diminishing  Returns  in  his  volume,  "The 
Distribution  of  Wealth."  The  Macmillan  Company,  New  York,  1914. 


212 


PRINCIPLES  OF  POLITICAL  ECONOMY 


days  on  it  and  get  only  forty-five  bushels  per  acre.  It  would  be 
less  economical  of  labor,  however,  since  by  using  only  twenty- 
five  days'  labor  the  farmer  gets  eighteen  bushels  for  each  day, 
whereas  he  gets  only  thirteen  bushels  for  each  day  when  he 
applies  fifty  days'  labor  to  its  cultivation.  Just  how  to  balance 
the  two  factors,  land  and  labor,  so  as  to  get  the  best  results 
from  both,  is  a  very  nice  problem  in  farm  management.  If 
labor  is  cheap  and  land  is  dear,  it  is  more  important  to  econo- 
mize space  than  labor ;  but  if  labor  is  dear  and  land  is  cheap, 
the  opposite  is  better. 


DAY'S  LABOR  OF  A 

MAN  AND  TEAM 

TOTAL  YIELDS  IN 

BUSHELS  PER  DAY'S 

BUSHELS  PER 

WITH  APPROPRIATE 

BUSHELS 

LABOR 

ACRE 

TOOLS 

I 

O 

O^ 

0 

5 

10 

5° 
150 

IO 
15 

Increasing 
returns 

5 
15 

iS 

270 

18 

27 

20 

380 

J9, 

38 

25 

45° 

18! 

45 

3° 

5J° 

i? 

Si 

35 

560 

16 

Diminishing 

56 

40 

600 

i5 

returns 

60 

45 

630 

M 

63 

5° 

650 

'3. 

65 

The  great  law  of  productivity.  This  law  of  diminishing 
returns  has  been  called  the  great  law  of  agricultural  produc- 
tion. It  is  a  part  of  a  wider  law  which  may  be  called  the  law 
of  variable  proportions,  which  is  the  fundamental  law  of  all 
production.  This  larger  law  will  be  discussed  in  a  later  chapter 
devoted  to  that  subject.1  For  the  present  it  is  sufficient  to 
point  out  that  it  presents  the  problem  of  balancing  the  different 
factors  which  have  to  be  combined  in  production.  It  is  much 
the  same  problem  at  bottom,  whether  it  be  the  balancing  of 
the  different  elements  of  plant  food  in  fertilizers,  the  different 

1  See  Chapter  XXXI. 


THE  GENETIC  INDUSTRIES  213 

elements  of  animal  food  in  the  feeding  of  cattle,  the  balancing 
of  such  factors  as  labor,  land,  and  capital  in  running  a  farm  or 
a  factory,  or  the  balancing  of  the  different  kinds  of  people 
that  are  required  to  make  up  a  nation. 

The  largest  industry.  Agriculture  is  not  merely  one  of  the 
basic,  or  primary,  industries  ;  it  is  the  most  important  of  all 
industries,  if  we  consider  the  world  at  large  or  any  large  section 
of  it  which  is  compelled  to  live  within  itself.  Considerable  sec- 
tions of  country  and  considerable  masses  of  population  may  live 
primarily  by  the  indoor  industries,  sending  out  their  surplus 
produce  to  distant  lands  and  bringing  back  in  exchange  the 
products  of  the  soil.  Thus,  a  country  like  England,  or  con- 
siderable portions  of  our  own  country,  such  as  southern  New 
England,  may  become  largely  urbanized ;  that  is  to  say,  the 
greater  portion  of  the  people  may  engage  in  indoor  rather  than 
in  outdoor  industries.  But  they  live  by  selling  the  products 
of  their  indoor  industries  to  people  far  beyond  their  own 
boundaries,  and  bringing  in  from  the  ends  of  the  earth  the 
products  of  the  soil.  Even  the  United  States  as  a  whole  is 
tending  to  become  an  urbanized  nation  ;  that  is,  it  is  tending 
toward  a  condition  where  more  than  half  of  her  people  will 
work  indoors  rather  than  outdoors.  Again,  there  is  a  tendency 
even  in  the  world  at  large  for  the  indoor  industries  to  gain 
somewhat  in  importance  as  compared  with  the  outdoor  indus- 
tries, though  it  is  unlikely  that  the  former  will  ever  actually 
overtake  the  latter. 

Why  agriculture  is  losing  ground.  As  civilization  advances, 
people  tend  to  demand  finer  and  finer  products  for  consump- 
tion. Usually,  though  not  in  every  case,  producing  a  finer 
product  means  doing  more  work  in  the  finer,  or  finishing, 
stages.  It  takes  no  more  wool  or  cotton,  and  therefore  it 
takes  no  more  agricultural  labor,  to  make  fine  than  coarse 
clothing.  The  difference  is  mainly  in  the  amount  of  work 
which  is  put  upon  the  material  after  it  leaves  the  farm.  In 
other  words,  of  the  total  work  put  upon  material,  a  smaller 


214          PRINCIPLES  OF  POLITICAL  ECONOMY 

proportion  is  outdoor  labor,  and  a  larger  proportion  is  indoor 
labor,  in  the  case  of  fine  clothes  than  in  that  of  coarse  clothes. 
The  same  principle  applies  to  shoes,  furniture,  vehicles,  and 
many  articles  of  food.  Throughout  the  whole  civilized  world 
this  increase  in  the  proportion  of  labor  performed  indoors  as 
compared  with  that  performed  outdoors  tends  to  increase  the 
city  population  more  rapidly  than  the  rural  population. 

Another  and  more  important  fact  is  the  increased  use  of 
agricultural  machinery.  Fewer  men  are  now  needed  in  the 
actual  cultivation  of  the  land,  as  some  of  the  work  is  done  in 
the  factories  where  farm  machinery  is  made.  Whereas  all  the 
men  who  formerly  helped  in  the  harvesting  of  a  wheat  crop 
actually  worked  in  the  field,  now  some  of  them  work  in  the 
shops  and  factories  making  harvesting  machinery,  and  only 
a  part  of  the  total  number  actually  work  in  the  fields.  The 
same  change  has  taken  place  with  respect  to  many  other  kinds 
of  farm  work. 

Influence  of  occupation  on  character.  Of  all  the  leading 
occupations  in  civilized  countries,  there  is  only  one  in  which 
success  depends  primarily  upon  the  ability  to  deal  efficiently 
with  nature  and  natural  forces, — that  is,  farming.  In  most  of 
the  others  success  depends  quite  as  much  on  ability  to  deal 
with  other  men  as  on  ability  to  deal  with  nature.  Those  whose 
success  depends  primarily  upon  the  ability  to  deal  with  other 
men,  whether  it  be  to  please,  persuade,  or  amuse  them,  or  to 
wheedle  the  money  out  of  their  pocketbooks,  must  necessarily 
become  expert  in  those  arts  of  expression  and  deportment 
which  are  pleasing  to  other  men.  Those,  on  the  other  hand, 
whose  success  depends  primarily  upon  their  ability  to  deal  with 
nature  must  become  equally  expert  in  the  art  of  dealing  with 
nature,  —  that  is,  in  handling  materials  and  directing  natural 
forces.  It  is  not  surprising,  therefore,  that  these  two  classes 
of  experts,  having  so  little  in  common,  should  sometimes  fail 
to  understand  and  appreciate  one  another.  A  farmer,  particu- 
larly the  old-fashioned,  self-sufficing  farmer,  who  had  few  points 


THE  GENETIC  INDUSTRIES  215 

of  contact  with  other  men  but  many  points  of  contact  with 
nature,  would  naturally  acquire  less  of  what  are  sometimes 
called  the  social  graces,  less  adroitness  in  the  amenities  of 
polite  society,  less  expertness  in  indoor  etiquette,  than  one  whose 
business  or  professional  success  depended  upon  these  forms 
of  skill.  They  who  get  their  living  out  of  the  soil  must  know 
the  soil,  the  weather,  the  times  and  seasons,  and  everything 
that  will  affect  their  success,  whereas  they  who  get  their  living 
by  dealing  with  other  men  must  know  the  ways  of  men. 

Commercial  agriculture.  The  characteristics  which  farmers 
of  an  earlier  day  developed  naturally  and  almost  of  necessity 
are  becoming  less  prominent  as  the  nature  of  agriculture 
changes.  Self-sufficing  agriculture  has  become  a  thing  of  the 
past,  and  we  are  developing  what  may  be  called  commercial 
agriculture  ;  that  is,  a  system  of  agriculture  in  which  the  farmer 
is  a  buyer  and  seller,  a  dealer  with  other  men,  to  almost  the 
same  extent  as  a  city  business  man.  He  must  now  understand 
not  only  markets  but  political  and  social  conditions,  even  those 
delicate  psychological  factors  upon  which  successful  buying  and 
selling  depend.  This  is  tending  to  wipe  out  whatever  distinc- 
tions formerly  existed  between  the  dwellers  in  the  city  and  the 
dwellers  in  the  country. 

The  independence  and  dependence  of  the  farmer.  We  are 
hearing  constantly  reiterated,  especially  by  advocates  of  the 
back-to-the-land  movement,  that  the  farmer  is  the  most  inde- 
pendent person  in  the  world.  The  farmer  himself  does  not 
always  see  it  that  way.  Probably  no  one  is  so  dependent  upon 
outward  physical  conditions  as  the  farmer.  He  must  continu- 
ally watch  the  weather  and  guard  against  pests  of  all  sorts,  animal 
diseases,  predatory  animals,  and  even  town  marauders.  Every 
year  lightning,  hail,  wind,  and  floods  destroy  crops  in  some 
part  of  the  country.  When  the  farmer  thinks  of  all  his 
troubles,  he  is  very  likely  to  long  for  the  comparative  safety  and 
independence  of  the  indoor  worker.  On  the  other  hand,  the  in- 
door worker  is  constantly  harassed  by  troubles  of  human  origin, 


216          PRINCIPLES  OF  POLITICAL  ECONOMY 

political  elections,  commercial  crises,  changes  of  fashion,  the 
organization  of  predatory  trusts  and  monopolies,  labor  troubles, 
the  type  of  advertiser  who  levies  something  akin  to  blackmail. 
When  he  thinks  of  all  his  troubles,  he  is  very  likely  to  long  for 
the  comparative  safety  and  independence  of  the  farmer. 

One  important  characteristic  of  agricultural  industry  is  its 
dependence  upon  the  seasons.  The  indoor  worker  is  frequently 
able  to  continue  uninterruptedly  in  one  kind  of  work,  week  after 
week,  month  after  month,  and  year  after  year.  From  the  very 
nature  of  the  case  this  is  impossible  in  agriculture,  for  every  crop 
has  its  growing  season  and  its  time  of  harvest.  On  every  farm 
almost  every  hour  of  the  day  has  its  own  special  work  to  be 
done,  so  that  work  is  continually  changing,  not  simply  from 
season  to  season,  from  month  to  month,  and  from  week  to  week, 
but  even  from  hour  to  hour.  This  makes  agriculture  almost  of 
necessity  an  industry  of  small  units.  In  an  indoor  industry, 
where  a  man  can  be  kept  at  the  same  job  continuously,  me- 
chanical or  automatic  administrative  methods  and  devices  may 
be  installed,  so  as  to  simplify  the  work  of  superintendence.  It 
is  possible,  therefore,  for  a  man  of  very  moderate  intellect  and 
power  to  run  an  establishment  employing  thousands  of  men. 
To  run  ten  men  efficiently  on  a  farm,  where  each  man  must  be 
assigned  a  new  job  frequently  on  a  moment's  notice,  where  the 
whole  work  of  the  farm  must  be  reorganized  to  meet  a  situa- 
tion brought  about  by  the  change  in  the  weather  or  in  the  con- 
ditions of  some  growing  crop,  requires  as  great  mental  ability 
as  to  run  an  indoor  establishment  employing  hundreds  of  men. 
To  run  a  farm  employing  one  hundred  men,  and  run  it  effi- 
ciently, would  require  the  ability  of  a  great  military  commander, 
a  merchant  prince,  a  captain  of  industry,  or  a  university  presi- 
dent. Very  few  farming  establishments  which  employ  as  many 
as  one  hundred  men  have  ever  succeeded  or  can  succeed. 

Country  people  generally  self-employed.  Perhaps  the  most 
important  fact  concerning  agriculture  is  that  a  very  large 
proportion  of  those  engaged  in  it  are  self-employed,  whereas 


THE  GENETIC  INDUSTRIES  217 

the  vast  majority  of  those  who  live  in  cities  are  employed  by 
other  people.  The  fact  that  farming  is  an  industry  of  small 
units,  while  indoor  industries  are  generally  industries  of  large 
units,  produces  this  difference. 

Some  of  the  deepest  students  of  political  and  social  tendencies 
have  come  to  doubt  whether  democracy  can  ever  develop  to 
a  high  stage  of  efficiency  except  among  people  who  are  in  the 
main  self-employed.  It  is  true  that  modern  democracy  arose 
first  in  the  cities  and  towns,  but  it  is  likewise  true  that  at  that 
time  the  cities  and  towns  were  the  homes  of  self-employed 
men.  Before  the  rise  of  the  factory  system  such  manufacturing 
as  was  done  was  carried  on  in  small  shops  by  craftsmen  who  were 
in  the  majority  of  cases  self-employed.  The  rural  districts,  how- 
ever, were  under  the  feudal  system.  Conditions  are  exactly 
reversed  at  the  present  time.  Under  the  factory  system  the 
great  majority  of  people  in  the  indoor  industries  work  under 
bosses.  Since  the  break-up  of  the  feudal  system  and  the  rise 
of  the  one-family  farm,  which  is  the  characteristic  farm  in  this 
country,  the  average  dweller  in  the  country  is  his  own  boss. 
This  may  have  something  to  do  with  the  fact  that  city  politics 
is  run  by  bosses  and  country  politics  is  not. 

According  to  the  census  of  1850  there  was  one  farm  in  this 
country  for  every  fourteen  persons  living  under  rural  conditions  ; 
that  is,  outside  of  cities  of  eight  thousand  inhabitants  or  more. 
According  to  the  census  of  1900  there  was  one  farm  for  every 
nine  persons  in  rural  residence.  This  shows  that,  up  to  1900 
at  any  rate,  the  tendency  was  toward  a  larger  number  of  inde- 
pendently operated  farms  in  proportion  to  the  rural  population. 
Again,  in  1900  there  was  one  farm  of  fifty  acres  or  more  for 
every  13.4  rural  dwellers.  When  we  consider  that  towns  and 
villages  of  eight  thousand  or  less  contain  a  fair  proportion  of 
those  13.4  people,  we  shall  see  that  in  the  open  country  itself 
there  are  very^few  people  engaged  in  work  on  each  farm.  They 
are  nearly  all  what  are  called  one-family  farms  ;  that  is,  farms 
operated  mainly  by  the  labor  power  of  one  family. 


21 8          PRINCIPLES  OF  POLITICAL  ECONOMY 

Interdependence  of  the  sexes.  The  division  of  labor  between 
the  sexes  is  much  more  marked,  of  course,  in  agriculture  than 
in  indoor  industries.  There  are  so  many  operations  on  every 
farm  which  require  the  superior  muscularity  of  the  male  as 
practically  to  shut  women  out.  At  the  same  time,  the  fact  that 
the  farms  are  so  far  apart  makes  it  impossible  for  these  muscu- 
lar males  to  get  along  without  women  to  run  their  houses.  The 
men  cannot  live  in  boarding  houses,  because  that  would  make 
it  necessary  to  live  too  far  from  their  work.  Practically  every 
farmer  has  to  have  a  wife  to  do  the  indoor  work.  This  may 
not  be  the  "highest  motive  for  marrying,  but  still  it  does  en- 
courage the  marriage  habit.  Consequently  one  finds  in  our 
rural  districts  fewer  old,  unmarried  males  than  one  finds  infest- 
ing our  cities  and  towns.  Moreover  there  are  comparatively 
few  opportunities  for  a  woman  to  make  an  independent  living 
in  the  country,  so  that  she  is  almost  under  compulsion  to 
marry  or  else  to  move  to  town,  where  she  can  get  remunera- 
tive employment. 

Forestry.  Forestry  as  distinct  from  lumbering  has  only 
recently  received  attention  in  this  country.  The  United  States 
Timber  Culture  Act  of  1873  was  designed  to  encourage  tree 
planting  by  granting  not  more  than  160  acres  of  the  public 
land  free  of  cost  to  anyone  who  would  plant  a  part  of  it  to  timber 
trees.  At  first  it  was  required  that  one  fourth  of  the  land  be  so 
planted,  but  the  requirement  was  soon  changed  to  one  sixteenth. 
The  purpose  was  obviously  to  encourage  the  partial  forestation 
of  the  western  prairies,  but  what  nature  herself  had  never  been 
able  to  accomplish  was  not  accomplished  by  act  of  Congress. 
As  one  rides  over  the  western  plains  one  occasionally  sees 
small  tracts  of  straggling  trees  fighting  for  an  existence  in  land 
which  is  too  dry  for  them.  These  are  the  results  of  that  act 
of  Congress.  Possibly  if  the  act  had  been  passed  earlier,  while 
there  was  public  land  left  in  the  humid  belt,  something  might 
have  been  accomplished,  but  even  this  is  doubtful.  Prairie  land 
which  will  grow  trees  is  generally  more  valuable  for  other 


THE  GENETIC   INDUSTRIES  219 

purposes.  Even  if  a  settler  had,  on  such  land,  made  trees  grow 
successfully,  he  would  probably  have  found  it  advantageous  to 
cut  them  down  in  order  to  devote  the  land  to  some  more  valu- 
able purpose. 

Forestry  economical  on  waste  land.  Forestry,  in  order  to  be 
an  economic  success,  must  obviously  be  practiced  on  land  which 
would  produce  a  greater  value  at  lower  cost  when  planted  to 
trees  than  when  planted  to  anything  else.  Mountainous  and 
semi-mountainous  lands,  stony  or  swampy  lands,  and  lands 
which  for  other  reasons  are  unsuited  to  tillage  or  pasturage 
furnish  the  natural  opportunity  for  the  practice  of  forestry  on 
a  large  scale.  While  the  annual  product  in  the  form  of  the 
annual  timber  growth  is  small,  the  cost  is  likewise  small.  Since 
the  land  would  otherwise  go  to  waste  altogether,  it  is  better  to 
get  even  a  small  product  than  none  at  all. 

Scientific  forestry.  In  recent  years  the  federal  government 
and  several  of  the  states  have  created  forest  reserves.  Scien- 
tific forestry  is  being  practiced,  but  it  must  be  remembered  that 
scientific  forestry  in  this  country  is  necessarily  different  from 
what  it  is  in  old  countries.  In  a  country  where  lumber  is  still 
cheap  as  compared  with  other  countries,  though  dear  as  com- 
pared with  what  it  once  was,  and  where  labor  is  dear,  as  it  is  in 
this  country,  one  cannot  do  in  the  name  of  science  what  one 
can  do  in  an  old  country,  where  lumber  is  dear  and  labor  cheap. 
A  serious  problem  for  the  American  forester  is  to  keep  costs 
down  ;  unless  he  does  this  he  may  find  that  the  timber  is  not 
worth  what  it  costs  to  grow  it.  For  this  reason  it  is  not  the 
custom  in  this  country  to  do  much  planting  of  trees  or  prepa- 
ration of  the  ground.  The  work  is  mainly  confined,  first,  to 
cutting  out  undesirable  growths  in  order  to  give  the  more  durable 
growths,  which  are  in  the  main  self-seeded,  a  chance  to  grow ; 
and,  second,  and  more  important  still,  to  guard  against  forest 
fires.  Our  summers,  which  are  dry  compared  with  those  of 
Europe,  make  the  forest  fire  the  great  enemy  of  the  American 
forester.  The  fight  against  diseases  and  pests  is  a  third  task. 


220          PRINCIPLES  OF  POLITICAL  ECONOMY 

Fish  culture.  Fish  culture  has  been  fostered  by  the  federal 
and  state  governments  of  the  United  States  and  by  various 
private  agencies.  Spawn  is  collected  and  hatched,  and  millions 
of  young  fish  are  distributed  in  our  streams  and  along  our 
seacoasts.  A  great  deal  of  study  is  being  given  to  the  habits 
of  various  edible  fishes  and  the  sources  of  their  food.  Private 
enterprise  is  also  active  in  stocking  streams  and  small  bodies 
of  water,  and  in  growing  fish  of  various  kinds  for  the  market. 

With  our  Great  Lakes  on  the  north,  the  two  oceans  on  the 
east  and  west,  and  the  Gulf  of  Mexico  on  the  south,  and  with 
all  our  noble  rivers,  we  have  access  to  such  vast  and  seemingly 
inexhaustible  supplies  of  fish  that  fish  culture  in  a  strict  sense 
has  not  developed  very  far  among  us.  Hatching  and  distribut- 
ing spawn,  and  leaving  the  spawn  to  shift  for  itself  and  take  its 
chances  along  with  other  wild  fish,  is  a  step  in  the  right  di- 
rection, but  it  stops  far  short  of  the  work  of  the  animal  breeders 
on  our  farms. 


CHAPTER  XVIII 

THE  MANUFACTURING  INDUSTRIES 

Various  types  of  manufacturing  establishments.  When  we 
think  of  a  manufacturing  industry  nowadays,  we  are  very  likely 
to  form'  a  picture  of  a  huge  building  or  group  of  buildings, 
dominated  by  a  tall  chimney  and  filled  with  roaring  machinery 
and  busy  men  and  women.  Such  is,  indeed,  the  typical  factory, 
though  much  manufacturing  is  still  done  in  small  shops  where 
a  few  men  work  with  small  and  comparatively  simple  tools. 
In  the  large  factory  the  tools  and  the  raw  material,  as  well  as 
the  buildings,  engines,  etc.,  are  usually  owned  by  one  man  or 
group  of  men,  while  the  work  is  done  by  another  group.  In 
smaller  establishments  various  combinations  are  found.  One 
kind  of  manufacturing  establishment  which  is  still  numerous 
and  widely  distributed  is  the  small  shop  where  the  worker  owns 
his  own  tools  and  equipment,  buys  his  own  raw  materials,  and 
sells  the  finished  product.  It  does  not  constitute  much  of  a 
change,  certainly  not  a  revolution,  when  he  hires  a  few  helpers 
or  apprentices  to  assist  him.  They  work  with  his  tools  upon 
his  raw  materials,  and  they  receive  their  compensation  in  the 
form  of  wages  instead  of  in  the  form  of  a  share  of  the  profits 
of  the  business.  Even  where  the  owner  ceases  to  do  any  of 
the  work  except  to  keep  the  accounts,  buy  the  raw  materials  and 
sell  the  products,  and  exercise  general  supervision  and  manage- 
ment, the  transition  may  have  been  so  gradual  as  to  attract  no 
one's  attention.  By  this  gradual  change,  however,  a  type  of 
manufactory  may  be  developed  which  is  very  different  from 
that  with  which  it  started. 

But  the  transition  is  not  always  made  in  this  way.  Other 
methods  of  organization  have  existed  at  various  times,  and  still 


222          PRINCIPLES  OF  POLITICAL  ECONOMY 

exist.  In  one  class  of  shops  the  worker  owns  his  own  tools 
and  runs  his  own  shop,  but  does  not  own  the  raw  materials 
upon  which  he  works.  These  are  furnished  by  an  outside 
person  who  supplies  them  and  owns  the  finished  product, 
paying  the  worker  a  price  agreed  upon  for  the  work  which  he 
does.  In  this  case  also  the  worker  may  hire  a  few  helpers  or 
apprentices. 

Still  another  method  is  found  where  the  worker  owns  neither 
the  materials  upon  which  nor  the  tools  with  which  he  works. 
A  third  person  supplies  both  materials  and  tools,  —  everything, 
in  fact,  except  the  place  in  which  the  work  is  done.  This  the 
laborer  himself  supplies. 

In  the  modern  factory,  however,  everything  is  assembled  in 
one  building  or  group  of  buildings,  around  one  power  plant ; 
everything  is  owned  by  one  group  of  individuals,  and  the 
laborer  furnishes  nothing  except  his  own  skill  and  strength. 
The  great  advantage  of  this  system  is  its  economical  use  of 
power.  Wherever  a  large  use  of  power  is  necessary,  it  is  im- 
portant that  it  be  effectively  and  economically  utilized.  In  all 
such  cases  the  factory,  in  this  modern  sense,  tends  to  displace 
all  other  methods  of  manufacturing.  Where  comparatively 
little  power  is  required,  and  where,  therefore,  it  is  not  of  such 
great  importance  that  it  be  economized,  other  methods  still 
survive.  In  some  cases,  however,  the  competition  of  the  factory 
is  so  severe  as  to  force  the  workers  in  the  small  shops  to 
work  for  very  low  wages.  Where  the  main  factor  in  success 
is  the  skill  of  the  worker  rather  than  cheap  power,  the  small 
shop  will  probably  continue  to  compete  successfully  with 
the  factory. 

There  has  been  a  general  tendency,  however,  for  the  large 
factory  to  grow  and  the  small  shop  to  decline  in  importance. 

Progress  toward  large-scale  production.  The  stages  of  this 
development  from  the  small  shop  to  the  factory  are  by  no 
means  clear.  Almost  every  form  of  manufacturing  will  be 
found  in  every  stage  of  economic  development.  The  large 


THE  MANUFACTURING  INDUSTRIES  223 

factory  has  come  to  be  the  dominant  form  only  since  the 
invention  of  power-driven  machinery.  The  industrial  revolu- 
tion, as  it  is  called,  was  the  rather  sudden  growth  of  the 
factory  to  this  dominant  position  during  the  latter  half  of  the 
eighteenth  century. 

Power-driven  machinery  and  large-scale  production.  A  re- 
markable series  of  inventions  followed  one  another  in  rapid 
succession  and  transformed  several  of  the  large  industries  of 
England  into  factory  industries.  These  changes  put  England 
definitely  in  the  lead  as  a  manufacturing  nation.  The  same 
revolution  came  in  other  countries  a  little  later.  Says  Marshall : l 

The  quarter  of  a  century  beginning  with  1 760  saw  improvements  follow 
one  another  in  manufacture  even  more  rapidly  than  in  agriculture.  During 
that  period  the  transport  of  heavy  goods  was  cheapened  by  Brindley's 
canals,  the  production  of  power  by  Watt's  steam  engine,  and  that  of  iron 
by  Cort's  processes  of  puddling  and  rolling  and  by  Roebuck's  method  of 
smelting  it  by  coal  in  lieu  of  the  charcoal  that  had  become  scarce ;  Hargreaves, 
Crompton,  Arkwright,  Cartwright,  and  others  invented,  or  at  least  made 
economically  serviceable,  the  spinning  jenny,  the  mule,  the  carding  machine, 
and  the  power  loom  ;  Wedgwood  gave  a  great  impetus  to  the  pottery  trade 
that  was  already  growing  rapidly ;  and  there  were  important  inventions  in 
printing  from  cylinders,  in  bleaching  by  chemical  agents,  and  in  other  proc- 
esses. A  cotton  factory  was  for  the  first  time  driven  directly  by  steam 
power  in  1 785,  the  last  year  of  the  period.  The  beginning  of  the  nineteenth 
century  saw  steamships  and  steam  printing  presses,  and  the  use  of  gas  for 
lighting  towns.  Railway  locomotives,  telegraphy,  and  photography  came  a 
little  later.  Our  own  age  has  seen  numberless  improvements  and  new 
economies  in  production,  prominent  among  which  are  those  relating  to  the 
production  of  steel,  the  telephone,  the  electric  light,  and  the  gas  engine ;  and 
the  social  changes  arising  from  material  progress  are  in  some  respects  more 
rapid  than  ever.  But  the  groundwork  of  the  changes  that  have  happened 
since  1785  was  chiefly  laid  in  the  inventions  of  the  years  1760  to  1785. 

The  inventions  which  preceded  the  cotton  factory.  A  more 
detailed  account  is  given  in  Walpole's  "  History  of  England 
from  1815  "2: 

1  Alfred  Marshall,  Principles  of  Economics,  4th  ed.,  p.  42.    London,  1898. 

2  Quoted  from  Bullock's  "Selected  Readings  in  Economics,"  pp.  128-143. 
Ginn  and  Company,  Boston,  1907. 


224          PRINCIPLES  OF  POLITICAL  ECONOMY 

In  the  middle  of  the  eighteenth  century,  then,  a  piece  of  cotton  cloth,  in 
the  true  sense  of  the  term,  had  never  been  made  in  England.  The  so-called 
cotton  goods  were  all  made  in  the  cottages  of  the  weavers.  The  yarn  was 
carded  by  hand ;  it  was  spun  by  hand ;  it  was  worked  into  cloth  by  a  hand 
loom.  The  weaver  was  usually  the  head  of  the  family ;  his  wife  and  un- 
married daughters  spun  the  yarn  for  him.  Spinning  was  the  ordinary 
occupation  of  every  girl,  and  the  distaff  was,  for  countless  centuries,  the 
ordinary  occupation  of  every  woman.  The  occupation  was  so  universal 
that  the  distaff  was  occasionally  used  as  a  synonym  for  "  woman."  "  Le 
royaume  de  France  ne  tombe  point  en  quenouille.  "...  To  this  day  every 
unmarried  girl  is  commonly  described  as  a  spinster. 

The  operation  of  weaving  was,  however,  much  more  rapid  than  that  of 
spinning.  The  weaver  consumed  more  weft  than  his  own  family  could 
supply  him  with ;  and  the  weavers  generally  experienced  the  greatest 
difficulty  in  obtaining  sufficient  yarn. 

THE  FLY  SHUTTLE 

About  the  middle  of  the  eighteenth  century  the  ingenuity  of  two  persons, 
a  father  and  a  son,  made  this  difference  more  apparent.  The  shuttle  had 
originally  been  thrown  by  the  hand  from  one  end  of  the  loom  to  the  other. 
John  Kay,  a  native  of  Bury,  by  his  invention  of  the  fly  shuttle,  saved  the 
weaver  from  this  labor.  .  .  .  By  means  of  these  inventions  the  productive 
power  of  each  weaver  was  doubled.  Each  weaver  was  easily  able  to  per- 
form the  amount  of  work  which  had  previously  required  two  men  to  do, 
and  the  spinsters  found  themselves  more  hopelessly  distanced  than  ever 
in  their  efforts  to  supply  the  weavers  with  weft.  .  .  . 

HARGREAVES'S  SPINNING  JENNY 

The  trade  was  in  this  humble  and  primitive  state  when  a  series  of  extraor- 
dinary and  unparalleled  inventions  revolutionized  the  conditions  under 
which  cotton  had  been  hitherto  prepared.  A  little  more  than  a  century 
ago  (1764-1767)  James  Hargreaves,  a  poor  weaver  in  the  neighborhood  of 
Blackburn,  was  returning  home  from  a  long  walk,  in  which  he  had  been 
purchasing  a  further  supply  of  yarn  for  his  loom.  As  he  entered  his  cottage 
his  wife,  Jenny,  accidentally  upset  the  spindle  which  she  was  using. 
Hargreaves  noticed  that  the  spindles,  which  were  now  thrown  into  an  upright 
position,  continued  to  revolve,  and  that  the  thread  was  still  spinning  in  his 
wife's  hand.  The  idea  immediately  occurred  to  him  that  it  would  be  possi- 
ble to  connect  a  considerable  number  of  upright  spindles  with  one  wheel, 
and  thus  multiply  the  productive  power  of  each  spinster.  He  contrived  a 
frame  in  one  part  of  which  he  placed  eight  rovings  in  a  row,  and  in  another 
part  a  row  of  eight  spindles.  .  .  .  His  ignorant  neighbors  hastily  concluded 


THE  MANUFACTURING  INDUSTRIES  225 

that  a  machine  which  enabled  one  spinster  to  do  the  work  of  eight  would 
throw  multitudes  of  persons  out  of  employment.  A  mob  broke  into  his 
house  and  destroyed  his  machine.  Hargreaves  himself  had  to  retire  to 
Nottingham,  where,  with  the  friendly  assistance  of  another  person,  he  was 
able  to  take  out  a  patent  for  the  spinning  jenny,  as  the  machine,  in  compli- 
ment to  his  industrious  wife,  was  called. 

ARKWRIGHT'S  WATER  FRAME 

The  invention  of  the  spinning  jenny  gave  a  new  impulse  to  the  cotton 
manufacture.  But  the  invention  of  the  spinning  jenny,  if  it  had  been  ac- 
companied by  no  other  improvements,  would  not  have  allowed  any  purely 
cotton  goods  to  be  manufactured  in  England.  The  yarn  spun  by  the  jenny, 
like  that  which  had  previously  been  spun  by  hand,  was  neither  fine  enough 
nor  hard  enough  to  be  employed  as  warp,  and  linen  or  woolen  threads  had 
consequently  to  be  used  for  this  purpose.  In  the  very  year,  however, 
(1769)  in  which  Hargreaves  moved  from  Blackburn  to  Nottingham, 
Richard  Arkwright  took  out  a  patent  for  his  still  more  celebrated  machine. 
.  .  .  The  principle  of  Arkwright's  great  invention  is  very  simple.  He 
passed  the  thread  over  two  pairs  of  rollers,  one  of  which  was  made  to 
revolve  much  more  rapidly  than  the  other.  The  thread,  after  passing  over 
the  pair  revolving  slowly,  was  drawn  into  the  requisite  tenuity  by  the 
rollers  revolving  at  a  higher  rapidity.  By  this  simple  but  memorable  inven- 
tion Arkwright  succeeded  in  producing  thread  capable  of  employment  as 
warp.  From  the  circumstance  that  the  mill  at  which  his  machinery  was 
first  erected  was  driven  by  water  power,  the  machine  received  the  some- 
what inappropriate  name  of  the  water  frame ;  the  thread  spun  by  it  was 
usually  called  the  water  twist. 

PAUL'S  CARDING  MACHINE 

The  invention  of  the  fly  shuttle  by  John  Kay  had  enabled  the  weavers 
to  consume  more  cotton  than  the  spinsters  had  been  able  to  provide ;  the 
invention  of  the  spinning  jenny  and  the  water  frame  would  have  been  use- 
less if  the  old  system  of  hand  carding  had  not  been  superseded  by  a  more 
efficient  and  more  rapid  process.  Just  as  Arkwright  applied  rotatory  motion 
to  spinning,  so  Lewis  Paul  introduced  revolving  cylinders  for  carding  cotton. 
Paul's  machine  consisted  of  "  a  horizontal  cylinder,  covered  in  its  whole  cir- 
cumference with  parallel  rows  of  cards  with  intervening  spaces,  and  turned 
by  a  handle.  Under  the  cylinder  was  a  concave  frame  lined  internally  with 
cards  exactly  fitting  the  lower  half  of  the  cylinder,  so  that  when  the  handle 
was  turned  the  cards  of  the  cylinder  and  of  the  concave  frame  worked 
against  each  other  and  carded  the  wool."  "  The  cardings  were  of  course 
only  of  the  length  of  the  cylinder,  but  an  ingenious  apparatus  was  attached 


226          PRINCIPLES  OF  POLITICAL  ECONOMY 

for  making  them  into  a  perpetual  carding.  Each  length  was  placed  on  a 
flat,  broad  riband,  which  was  extended  between  two  short  cylinders,  and 
which  wound  upon  one  cylinder  as  it  unwound  from  the  other." 

CROMPTON'S  MULE 

This  extraordinary  series  of  inventions  placed  an  almost  unlimited  sup- 
ply of  yarn  at  the  disposal  of  the  weaver.  But  the  machinery,  which  had 
been  thus  introduced,  was  still  incapable  of  providing  yarn  fit  for  the  finer 
qualities  of  cotton  cloth.  "  The  water  frame  spun  twist  for  warps,  but  it 
could  not  be  advantageously  used  for  the  finer  qualities,  as  thread  of  great 
tenuity  has  not  strength  to  bear  the  pull  of  the  rollers  when  winding  itself 
on  the  bobbin."  This  defect,  however,  was  removed  by  the  ingenuity  of 
Samuel  Crompton,  a  young  weaver  residing  near  Bolton.  Crompton  suc- 
ceeded (i  774-1 779)  in  combining  in  one  machine  the  various  excellences  of 
"  Arkwright's  water  frame  and  Hargreaves's  jenny."  Like  the  former,  his 
machine,  which  from  its  nature  is  happily  called  the  mule,  "  has  a  system 
of  rollers  to  reduce  the  roving ;  and,  like  the  latter,  it  has  spindles  without 
bobbins  to  give  the  twist,  and  the  thread  is  stretched  and  spun  at  the  same 
time  by  the  spindles  after  the  rollers  have  ceased  to  give  out  the  rove.  " 

Before  Crompton's  time  it  was  thought  impossible  to  spin 
eighty  hanks  to  the  pound ;  the  mule  has  spun  three  hundred 
and  fifty  hanks  to  the  pound !  The  natives  of  India  could  spin 
a  pound  of  cotton  into  a  thread  one  hundred  and  nineteen  miles 
long;  the  English  succeeded  in  spinning  the  same  thread  to 
a  length  of  one  hundred  and  sixty  miles.  Yarn  of  the  finest 
quality  was  at  once  at  the  disposal  of  the  weaver,  and  an 
opportunity  was  afforded  for  the  production  of  an  indefinite 
quantity  of  cotton  yarn.  But  the  great  inventions  which  have 
thus  been  enumerated  would  not  of  themselves  have  been 
sufficient  to  establish  the  cotton  manufacture  on  its  present 
basis.  The  ingenuity  of  Hargreaves,  Arkwright,  and  Cromp- 
ton had  been  exercised  to  provide  the  weaver  with  yarn. 
Their  inventions  had  provided  him  with  more  yarn  than  he 
could  by  any  possibility  use.  The  spinster  had  beaten  the 
weaver  just  as  the  weaver  had  previously  beaten  the  spinster, 
and  the  manufacture  of  cotton  seemed  likely  to  stand  still 
because  yarn  could  not  be  woven  more  rapidly  than  an  expert 
workman  with  Kay's  improved  fly  shuttle  could  weave  it. 


THE  MANUFACTURING  INDUSTRIES  227 

CARTWRIGHT'S  POWER  LOOM 

Such  a  result  was  actually  contemplated  by  some  of  the  leading  manu- 
facturers, and  such  a  result  might  possibly  have  temporarily  occurred  if  it 
had  not  been  averted  by  the  ingenuity  of  a  Kentish  clergyman.  Edmund 
Cartwright,  a  clergyman  residing  in  Kent,  happened  to  be  staying  at 
Matlock  in  the  summer  of  1 784,  and  to  be  thrown  into  the  company  of 
some  Manchester  gentlemen.  The  conversation  turned  on  Arkvvright's 
machinery,  and  "  one  of  the  company  observed  that  as  soon  as  Arkwright's 
patent  expired  so  many  mills  would  be  erected  and  so  much  cotton  spun 
that  hands  would  never  be  found  to  weave  it."  Cartwright  replied  "  that 
Arkwright  must  then  set  his  wits  to  work  to  invent  a  weaving  mill."  The 
Manchester  gentlemen,  however,  unanimously  agreed  that  the  thing  was 
impracticable.  Cartwright  "  controverted  the  impracticability  by  remarking 
that  there  had  been  exhibited  an  automaton  figure  which  played  at  chess." 
It  could  not  be  "  more  difficult  to  construct  a  machine  that  shall  weave  than 
one  which  shall  make  all  the  variety  of  moves  which  are  required  in  that 
complicated  game."  Within  three  years  he  had  himself  proved  that  the 
invention  was  practicable  by  producing  the  power  loom.  Subsequent  inven- 
tors improved  the  idea  which  Cartwright  had  originated,  and  within  fifty 
years  from  the  date  of  his  memorable  visit  to  Matlock  there  were  not  less 
than  one  hundred  thousand  power  looms  at  work  in  Great  Britain 
alone.  .  .  . 

Such  are  the  leading  inventions  which  made  Great  Britain  in  less  than 
a  century  the  wealthiest  country  in  the  world.  .  .  . 

THE  STEAM  ENGINE  OF  NEWCOMEN  AND  WATT 

Steam  was  actually  used  early  in  the  eighteenth  century  as  a  motive  power 
for  pumping  water  from  mines ;  and  Newcomen,  a  blacksmith  in  Dartmouth, 
invented  a  tolerably  efficient  steam  engine.  It  was  not,  however,  till  1 769, 
that  James  Watt,  a  native  of  Greenock,  and  a  mathematical-instrument 
maker  in  Glasgow,  obtained  his  first  patent  for  "  methods  of  lessening  the 
consumption  of  steam,  and  consequently  of  fuel,  in  fire  engines."  James 
Watt  was  born  in  1 736.  His  father  was  a  magistrate,  and  had  the  good 
sense  to  encourage  the  good  turn  for  mechanics  which  his  son  displayed 
at  a  very  early  age.  At  the  age  of  nineteen  Watt  was  placed  with  a 
mathematical-instrument  maker  in  London,  but  feeble  health,  which  had 
interfered  with  his  studies  as  a  boy,  prevented  him  from  pursuing  his 
avocations  in  England.  Watt  returned  to  his  native  country.  The  Glasgow 
body  of  Arts  and  Trades,  however,  refused  to  allow  him  to  exercise  his 
calling  within  the  limits  of  their  jurisdiction ;  and  had  it  not  been  for  the 
University  of  Glasgow,  which  befriended  him  in  his  difficulty  and  appointed 


228          PRINCIPLES  OF  POLITICAL  ECONOMY 

him  their  mathematical-instrument  maker,  the  career  of  one  of  the  greatest 
geniuses  whom  Great  Britain  has  produced  would  have  been  stinted  at 
its  outset. 

There  happened  to  be  in  the  university  a  model  of  Newcomen's  engine. 
It  happened,  too,  that  the  model  was  defectively  constructed.  Watt,  in  the 
ordinary  course  of  his  business,  was  asked  to  remedy  its  defects,  and  he 
soon  succeeded  in  doing  so.  But  his  examination  of  the  model  convinced 
him  of  serious  faults  in  the  original.  Newcomen  had  injected  cold  water 
into  the  cylinder  in  order  to  condense  the  steam  and  thus  obtain  a  neces- 
sary vacuum  for  the  piston  to  work  in.  Watt  discovered  that  three  fourths 
of  the  fuel  which  the  engine  consumed  was  required  to  reheat  the  cylinder. 
"  It  occurred  to  him  that,  if  the  condensation  could  be  performed  in  a  sepa- 
rate vessel,  communicating  with  the  cylinder,  the  latter  could  be  kept  hot, 
while  the  former  was  cooled,  and  the  vapor  arising  from  the  injected  water 
could  also  be  prevented  from  impairing  the  vacuum.  The  communication 
could  easily  be  effected  by  a  tube,  and  the  water  could  be  pumped  out. 
This  is  the  first  and  the  grand  invention  by  which  he  at  once  saved  three 
fourths  of  the  fuel  and  increased  the  power  one  fourth,  thus  making  every 
pound  of  coal  produce  five  times  the  force  formerly  obtained  from  it." 
But  Watt  was  not  satisfied  with  this  single  improvement.  He  introduced 
steam  above  as  well  as  below  the  piston,  and  thus  again  increased  the 
power  of  the  machine.  He  discovered  the  principle  of  parallel  motion,  and 
thus  made  the  piston  move  in  a  true  straight  line.  He  regulated  the  supply 
of  water  to  the  boiler  by  the  means  of  "  floats,"  the  supply  of  steam  to  the 
cylinder  by  the  application  of  "  the  governor,"  and,  by  the  addition  of  all 
these  discoveries,  "  satisfied  himself  that  he  had  almost  created  a  new  engine 
of  incalculable  power,  universal  application,  and  inestimable  value.  "... 

The  steam  engine,  indeed,  would  not  have  been  invented  in  the  eighteenth 
century,  or  would  not  at  any  rate  have  been  discovered  in  this  country,  if 
it  had  not  been  for  the  vast  mineral  wealth  with  which  Great  Britain  has 
fortunately  been  provided.  .  .  . 

DUDLEY'S  METHOD  OF  SMELTING  IRON  WITH  COAL 

At  the  commencement  of  the  seventeenth  century  Dud  Dudley  .  .  .  had 
proved  the  feasibility  of  smelting  iron  with  coal ;  but  the  prejudice  and 
ignorance  of  the  work  people  had  prevented  the  adoption  of  his  invention. 
In  the  middle  of  the  eighteenth  century,  attention  was  again  drawn  to  his 
process,  and  the  possibility  of  substituting  coal  for  wood  was  conclusively 
established  at  the  Darby's  works  at  Coalbrook  Dale.  The  impetus  which 
was  thus  given  to  the  iron  trade  was  extraordinary.  The  total  produce  of 
the  country  amounted  at  the  time  to  only  1 8,000  tons  of  iron  a  year,  four 


THE  MANUFACTURING  INDUSTRIES  229 

fifths  of  the  iron  used  being  imported  from  Sweden.  In  1802  Great  Britain 
possessed  1 68  blast  furnaces,  and  produced  1 70,000  tons  of  iron  annually. 
In  1806  the  produce  had  risen  to  250,000  tons;  it  had  increased  in  1820 
to  400,000  tons.  Fifty  years  afterwards,  or  in  1870,  6,000,000  tons  of  iron 
were  produced  from  British  ores. 

The  progress  of  the  iron  trade  indicated,  of  course,  a  corresponding 
development  of  the  supply  of  coal.  Coal  had  been  used  in  England  for 
domestic  purposes  from  very  early  periods.  Sea  coal  had  been  brought  to 
London;  but  the  citizens  had  complained  that  the  smoke  was  injurious 
to  their  health,  and  had  persuaded  the  legislature  to  forbid  the  use  of  coal 
on  sanitary  grounds.  The  convenience  of  the  new  fuel  triumphed,  however, 
over  the  arguments  of  the  sanitarians  and  the  prohibitions  of  the  legisla- 
ture, and  coal  continued  to  be  brought  in  constantly  though  slowly  increas- 
ing quantities  to  London.  Its  use  for  smelting  iron  led  to  new  contrivances 
for  insuring  its  economical  production. 

Decay  of  small  industries.  Scarcely  less  striking  would  be 
an  account  of  the  rise  of  machine  production  in  other  indus- 
tries, following  the  use  of  steam  power  and  cheap  iron  and 
steel.  Shoe  manufacturing,  the  grinding  of  flour,  the  slaughter- 
ing of  meat  animals  and  the  curing  and  packing  of  meat,  the 
manufacture  of  watches,  automobiles,  etc.,  and  various  other 
industries  have  shown  the  same  tendency  toward  the  factory 
system  of  production.  Regarding  changes  in  our  own  country, 
Professor  Ely  writes  : 1 

Let  the  reader  call  to  mind  the  many  things  in  our  economic  life  which 
the  world  never  saw  before.  He  will,  of  course,  think  at  once  of  the  rail- 
way and  of  steam  navigation,  and  of  other  applications  of  steam  to  industry. 
But  these  have  brought  other  important  new  phenomena.  The  concentra- 
tion of  large  masses  of  working-people  in  great  factories  of  which  they  own 
no  part,  and  under  a  single  employer,  such  as  we  see  daily,  is  something 
new  for  skilled  mechanics ;  not  that  nothing  of  the  kind  ever  existed  be- 
fore, but  its  existence  is  so  much  more  common  and  affects  so  many  more 
people  that  in  its  social  aspects  it  is  new.  In  the  last  century,  and  in  previous 
centuries  of  the  Middle  Ages,  artisans  owned  the  tools  which  they  used, 
and  after  they  had  fully  mastered  their  trades  usually  called  no  man 
master,  but  worked  in  their  own  little  shops.  Even  within  the  memory 
of  the  author,  still  comparatively  a  young  man,  this  condition  of  things 

1  Richard  T.  Ely,  An  Introduction  to  Political  Economy,  pp.  55-57.  New 
York  Chautauqua  Press,  1889. 


230          PRINCIPLES  OF  POLITICAL  ECONOMY 

has  become  less  common.  The  smith,  under  the  spreading  tree,  of  whom 
Longfellow  sang,  is  disappearing.  He  has  left  the  cross-roads  in  the  little 
village  and  now  works  in  a  machine  shop.  His  friends,  the  carpenter  and 
the  shoemaker,  have  accompanied  him.  A  few  artisans  may  stay  to  do 
repairing  and  other  small  work,  but  the  cheaper  processes  of  vast  establish- 
ments have  rendered  this  migration  inevitable  for  the  many.  Only  the  few 
among  artisans  can  live  in  the  old  style. 

CONCENTRATION  IN  LARGE  CITIES 

Houses  are  constructed  in  large  establishments  and  they  are  sent  to  small 
places  where  it  is  only  necessary  to  put  them  together.  Merchants  have 
also  been  obliged  to  leave  the  villages  where  they  were  owners  of  inde- 
pendent establishments  to  seek  employment  in  immense  city  retail  and 
wholesale  shops,  because  the  railroad  has  carried  their  customers  away 
from  them. 

The  amount  of  production  increases  continually,  but  the  number  of  sepa- 
rate establishments  where  production  is  carried  on  decreases  uninterruptedly. 
Milling  serves  as  a  good  illustration.  "  The  completion  of  the  great  mills 
has  caused  the  abandonment  and  decay  of  hundreds  of  the  picturesque,  old- 
fashioned  neighborhood  mills.  In  1 870,  according  to  the  census  of  that  year, 
there  were  in  the  entire  country  22,573  grist  mills,  58,448  hands,  represent- 
ing $151,500,000  of  capital,  and  making  a  product  worth  $444,900,000. 
In  1880  the  number  of  establishments  was  24,338,  the  number  of  hands 
58,407,  the  capital  invested  $177,300,000,  and  the  value  of  the  product 
was  $505,100,000  (the  price  of  flour  had  declined  ten  per  cent  in  this 
decade).  The  increase  shown  in  the  number  of  establishments  ...  is  more 
apparent  than  real,  the  great  bulk  of  flour  having  been  made  in  a  decidedly 
smaller  number  of  mills  in  1880  than  in  1870.  Since  1880  the  blighting 
effect  of  the  great  merchant  mills  upon  the  small  establishments  has  become 
visible  to  every  one.  According  to  the  Miller's  Directory  for  1884,  .  .  . 
there  were  at  that  time  some  22,940  mills  in  the  country,  a  decline  of  1,398 
from  the  census  figures  of  1880.  .  .  .  From  1884  to  1886  .  .  .  the  number 
of  milling  establishments  has  declined  to  16,856  ...  a  loss  in  two  years  of 
more  than  twenty-six  per  cent."  l  The  number  of  mills  in  the  South  has 
declined  more  rapidly  than  elsewhere.  In  1880,  in  North  Carolina,  1313 
mills  employed  only  1844  men,  but  in  the  same  state  there  were  only  632 
mills  in  1886.  It  is  said  that  the  number  of  mills  in  the  country  is  destined 
to  become  very  much  smaller  still.  Readers  can  readily  gather  from  census 
and  trade  reports  many  similar  illustrations  of  this  concentration  of  busi- 
ness, which  is  one  of  the  main  causes  of  the  existence  of  present  problems. 

1  Albert  Shaw  in  the  Chautauquan  for  October,  1887. 


THE  MANUFACTURING  INDUSTRIES  231 

Tendency  of  mechanically  expert  nations  toward  indoor 
industries.  Large  portions  of  the  world's  population  still  remain 
in  a  condition  of  mechanical  inexpertness.  They  find  it  more 
advantageous  to  live  from  the  products  of  the  soil,  exchanging 
these  products  for  the  manufactured  products  of  the  mechani- 
cally expert  nations.  Other  populations,  like  those  of  our  own 
West,  while  mechanically  expert,  occupy  land  of  such  abun- 
dance and  fertility  that  they  find  it  more  profitable  to  cultivate 
land  than  to  turn  to  the  indoor  industries.  They  use  their  me- 
chanical expertness  in  contriving  and  operating  farm  machinery. 
They  exchange  their  large  surplus  of  farm  products  for  the 
manufactured  products  of  other  people  who  are  mechanically 
expert  and  who  occupy  lands  of  less  extent  and  lower  fertility. 
The  latter,  not  having  vast  areas  to  cultivate,  find  less  profit- 
able opportunities  for  their  mechanical  expertness  out  of  doors 
than  indoors.  Therefore  they  develop  the  indoor  industries. 
England,  who  got  a  good  start  ahead  of  the  rest  of  the  world  in 
this  line  of  development,  prospered  amazingly.  The  eastern  part 
of  the  United  States,  together  with  France,  Belgium,  Holland, 
and  lately  Germany,  have  been  following  in  the  same  direction. 
As  this  tendency  increases,  the  competition  among  the  indoor 
industries  is  likely  to  become  so  intense  as  to  reduce  the  profits 
and  drive  a  certain  percentage  of  the  people  back  to  the  farms. 

Taking  the  United  States  as  a  whole,  it  is  rapidly  ceasing 
to  be  primarily  an  agricultural  country  and  is  becoming  a  manu- 
facturing country,  following  a  similar  development  in  England 
and  northwestern  Europe.  Canada,  South  America,  Australia, 
South  Africa,  and  all  countries  where  white  men  colonize  will 
doubtless  follow  in  the  same  direction.  There  will  then  be  left 
only  the  tropics  in  which  to  sell  the  surplus  products  of  manu- 
facture and  from  which  to  draw  the  surplus  products  of  the 
soil.  It  is  probable  that  the  development  of  the  indoor  indus- 
tries will  be  checked  before  that  state  is  reached.  In  that  case 
each  country  will  have  to  preserve  a  balance,  or  equilibrium, 
between  the  indoor  and  the  outdoor  industries. 


232          PRINCIPLES  OF  POLITICAL  ECONOMY 

As  pointed  out  in  the  chapter  on  the  Genetic  Industries,  the 
advance  in  civilization,  and  the  general  improvement  of  living 
conditions,  tends  to  add  to  the  relative  importance  of  the  indoor 
as  compared  with  the  outdoor  industries.  The  finer  the  goods 
we  demand,  the  more  work  we  make,  generally  speaking,  for 
the  indoor  workers.  Even  farm  work  itself  comes,  in  a  sense, 
to  be  done  indoors  rather  than  outdoors.  The  substitution  of 
the  tractor  for  the  horse  may  serve  to  illustrate  this  statement. 
The  raising  of  horses  is  outdoor  work ;  the  manufacturing  of 
tractors  is  indoor  work.  If  we  use  more  tractors  and  fewer 
horses,  a  larger  proportion  of  our  workers  will  work  indoors 
and  a  smaller  proportion  outdoors. 

This  is  a  process  which  must  be  expected  to  continue  even 
though  we  remain  a  self-sufficing  nation.  If  we  cease  to  be  a 
self-sufficing  nation,  bringing  raw  materials  and  products  of  the 
soil  from  distant  portions  of  the  earth,  and  sending  in  exchange 
the  more  refined  products  of  the  indoor  industries,  we  must 
expect  that  manufacturing  will  become  in  larger  and  larger 
degree  our  dominant  occupation. 


CHAPTER  XIX 
TRANSPORTATION 

Moving  things  over  long  distances.  Since  all  industry  con- 
sists in  moving  materials  from  one  place  to  another,  it  follows 
as  a  matter  of  course  that  transportation  must  form  an  important 
part  of  the  industrial  system.  That  which  we  call  transportation 
differs,  however,  from  other  kinds  of  work  in  that  it  consists 
in  moving  materials  over  long  distances,  —  distances  which  are 
measured  in  miles  rather  than  in  inches,  feet,  or  yards.  The 
transportation  system  has  been  likened  to  the  veins  and  arteries 
of  the  physiological  organism,  just  as  the  telegraph  and  tele- 
phone systems  have  been  likened  to  the  nerves. 

The  development  of  the  factory  system  as  described  in  the 
preceding  chapter,  and  of  large-scale  production  in  general, 
would  have  been  impossible  without  cheap  transportation. 

The  railway  and  the  factory  have  gone  hand  in  hand  in  their  develop- 
ment and  in  their  economic  results.  With  the  means  of  transportation  which 
existed  two  hundred  years  ago  large  industries  would  have  been  impossible. 
The  substitution  of  turnpikes  for  common  roads,  of  canals  for  turnpikes, 
and  of  railways  for  canals  was  as  essential  a  part  of  industrial  progress  as 
was  the  development  of  the  factory  system.1 

Without  a  wide  market  on  which  to  sell  its  large  product  a 
large  factory  or  manufacturing  establishment  would  be  an  impos- 
sibility. In  the  days  of  restricted  local  markets,  when  each  little 
community  was  almost  self-sufficing,  small  shops  having  indi- 
vidual handicraftsmen  could  supply  the  needs  of  each  such 
unit.  Not  the  least  important  of  the  changes  which  have  come 
about  since  the  middle  of  the  eighteenth  century  has  been  the 

1  President  A.  T.  Hadley,  ''Transportation,"  in  Palgrave's  Dictionary  of 
Political  Economy. 

233 


234          PRINCIPLES  OF  POLITICAL  ECONOMY 

battering  down  of  the  walls  which  divided  one  restricted  market 
from  another,  and  the  creation  of  nation-wide  or  world-wide 
markets  instead  of  a  series  of  local,  restricted  markets. 

The  widening  of  the  market.  Cheap  transportation,  more 
than  anything  else,  has  made  possible  the  development  of  nation- 
wide and  world-wide  markets.  Raw  materials  sometimes  have 
to  be  brought  long  distances,  especially  in  a  case  where  several 
different  kinds  of  raw  material  enter  into  the  making  of  a  given 
product.  These  different  kinds  of  raw  material  are  not  always 
found  in  close  juxtaposition.  The  iron  ore  of  the  Lake  Superior 
region  would  be  practically  useless,  because  of  its  distance  from 
the  coal  fields,  were  it  not  for  cheap  transportation  on  the  Great 
Lakes,  by  means  of  which  it  can  be  carried  almost  to  the  mouths 
of  the  coal  mines  of  Illinois,  Indiana,  Ohio,  and  Pennsylvania. 

In  other  cases  the  raw  material  itself  is  produced  over  such 
wide  areas  as  to  make  centralized  and  large-scale  production  an 
impossiblity  without  cheap  transportation.  The  slaughtering  of 
meat  animals  and  the  curing  and  packing  of  the  meat  is  a  case 
in  point.  These  animals  must  be  grown  on  the  farms  and 
ranges  over  considerable  areas.  Without  cheap  transportation 
they  would  have  to  be  slaughtered  and  consumed  nearer  the 
sources  of  production ;  with  cheap  transportation  they  may  be 
sent  to  a  few  large  packing  centers,  and  from  these  centers  the 
meat  can  be  distributed  over  practically  the  whole  country  and 
over  considerable  portions  of  the  civilized  world.  Without  cheap 
transportation  every  large  city  would  be  dependant  upon  the 
supply  of  meat  that  could  be  grown  within  driving  distance,  that 
is,  within  such  distances  as  the  animals  could  travel  on  foot. 
They  would  have  to  be  slaughtered  near  each  center  of  con- 
sumption in  order  that  the  meat  might  be  distributed  economi- 
cally. Without  cheap  transportation  the  cotton  industry  of  New 
England  could  never  have  developed  to  such  proportions  as  it 
has.  The  raw  material  is  all  produced  hundreds  of  miles,  and 
most  of  it  thousands  of  miles,  away  from  the  factories.  The 
manufactured  product,  in  turn,  is  distributed  over  the  entire 


TRANSPORTATION  235 

country  and  considerable  portions  of  the  civilized  world.  Every 
description  of  the  industrial  revolution  in  England  gives  great 
attention  to  the  cotton  and  woolen  industries,  for  it  was  in  these 
industries  that  the  transition  was  most  striking.  And  perhaps 
the  most  striking  feature  was  the  long  distances  over  which  the 
raw  material  had  to  be  transported  and  the  wide  markets  in 
which  the  finished  product  could  then  be  sold.  Before  the 
development  of  the  railways,  water  transportation  was  the  only 
cheap  form  ;  and  England  was  peculiarly  well  situated  with 
respect  to  .ocean  transportation. 

However  great  the  economies  of  large-scale  production  may 
be,  if  the  cost  of  transportation  were  as  great  as  it  once  was, 
the  small  producer,  using  locally-produced  raw  materials  and 
selling  on  a  local  market,  would  save  so  much  on  the  cost  of 
transportation  as  to  give  him  an  advantage  over  the  biggest 
factory  located  a  long  distance  away.  The  cheaper  transporta- 
tion becomes,  the  less  the  saving  of  transportation  costs  will 
figure  as  an  advantage  in  industry.  Every  industry  will  then 
tend  to  be  located  in  the  place  where  other  advantages  are 
greatest.  When  freight  costs  one  cent  per  ton  per  mile,  one  can 
readily  see  that  one  could  ship  a  suit  of  clothes  weighing,  say  ten 
pounds,  a  long  distance  without  adding  perceptibly  to  the  cost 
of  the  suit.  The  freight  for  a  thousand  miles  would  be  only  five 
cents.  If  it  cost  twenty-five  cents  per  ton  per  mile,  distance 
would  be  a  very  large  factor  in  the  location  of  a  clothing  industry. 

Water  transportation  developed  first.  Historically,  water 
transportation  was  cheapened  long  before  we  had  cheap  land 
transportation.  Consequently  we  find  that  commerce  in  a  large 
sense  developed  first  on  the  water.  Great  cities  were  located 
where  there  were  advantages  in  water  transportation.  Con- 
siderable commerce  has  always  been  carried  on,  from  the  very 
earliest  times,  by  means  of  caravans  traveling  over  land,  but  the 
cost  of  this  kind  of  transportation  was  so  great  that  the  com- 
merce which  developed  under  these  conditions  was  necessarily 
confined  to  articles  of  luxury  which  embodied  large  value 


236          PRINCIPLES  OF  POLITICAL  ECONOMY 

in  small  bulk.  "The  wealth  of  the  Indies,"  as  that  term 
was  used  in  Europe,  consisted  of  silks,  gold  and  silver  and 
precious  stones,  and  a  few  rare  delicacies  for  the  very  rich. 
Some  considerable  cities,  however,  developed  along  these  over- 
land routes.  Damascus  and  Palmyra  in  western  Asia,  Troyes 
and  Nuremberg  in  Europe,  may  be  cited  as  examples.  But  the 
great  cities  developed  along  water  routes ;  Canton,  Hankow, 
Calcutta,  Delhi,  Nineveh,  Babylon,  Bagdad,  Tyre,  Constanti- 
nople, Memphis,  Alexandria,  Venice,  Genoa,  Antwerp,  and 
London  may  be  cited  as  examples. 

Water  transportation  developed  first,  of  course,  where  it  was 
safe  ;  that  is,  on  rivers  or  small  bodies  of  inclosed  water.  The 
great  rivers  were  the  first  great  routes  for  cheap  transportation. 
The  valleys  of  the  Nile,  the  Euphrates,  the  Tigris,  the  Ganges, 
and  the  Yangtze  developed  great  civilizations,  partly  because 
they  contained  good  soil  and  opportunities  for  irrigation,  but 
also  because  they  furnished  means  of  transportation. 

The  keel  and  the  compass.  The  next  stage  was  reached 
when  the  sailors  ventured  beyond  the  mouths  of  the  rivers 
along  the  adjacent  coasts  and  in  inclosed  seas  like  the  .^Egean, 
the  Mediterranean,  and  the  Baltic.  The  difficulty  of  navigation 
in  those  days  was  such  as  to  make  an  ocean  voyage  extremely 
hazardous,  if  at  all  possible.  The  boats  of  those  early  days 
were  flat-bottomed,  that  is,  they  had  no  keels  ;  it  was  therefore 
impossible  to  sail  in  the  teeth  of  the  wind.  Sails  could  be  used 
only  when  the  wind  was  favorable  ;  that  is,  when  it  blew  almost 
in  the  direction  in  which  the  sailors  wanted  to  go.  At  other 
times  they  had  to  depend  upon  large  numbers  of  oars  worked 
by  human  muscles.  The  galley  slave  was  a  part  of  that  system  of 
transportation.  There  is  some  dispute  as  to  the  origin  of  the  keel, 
but  whenever  or  wherever  it  was  invented,  it  must  be  regarded  as 
one  of  the  great  inventions  of  history,  for  it  enabled  the  sailor 
to  sail  almost  into  the  teeth  of  the  wind  and,  by  skillful  tacking, 
to  go  anywhere  he  wanted  to,  regardless  of  the  direction  of  the 
wind.  A  little  later  the  mariner's  compass  came  into  use,  by 


TRANSPORTATION  237 

means  of  which  the  sailor  could  venture  out  of  sight  of  land 
and  still  keep  his  bearings  and  reach  his  destination. 

With  these  two  inventions  in  their  possession,  sailors  could 
now  leave  not  only  the  rivers  but  the  inclosed  seas,  and  venture 
away  from  the  seacoasts  and  traverse  the  broad,  uncharted 
ocean.  Columbus  never  would  have  dared  to  venture  on  his 
quest  of  an  ocean  route  to  India  without  these  two  inventions. 

The  world  faces  on  the  ocean.  As  a  result  of  the  discoveries 
of  Columbus,  Vasco  da  Gama,  and  others  the  world  was  said 
to  have  faced  about.  The  various  nations  had  formerly  faced 
inward,  with  their  backs  to  the  ocean  ;  the  land  united  peoples, 
but  the  ocean  divided  them.  Since  that  time  they  have  tended 
to  face  outward,  that  is,  to  face  the  ocean  ;  and  it  is  now  said 
that  the  land  divides,  but  the  ocean  unites.  While  distances  are 
great  over  these  ocean  routes,  the  building  of  larger  ships 
propelled  either  by  steam  or  by  wind  has  made  ocean  transpor- 
tation the  cheapest  of  all  forms.  Where  time  is  not  a  factor, 
the  huge  sailing  vessels  can  carry  freight  thousands  of  miles 
cheaper  than  it  can  be  carried  hundreds  of  miles  even  on  our 
best  railways.  Where  time  is  a  factor,  the  cost  is  slightly 
greater,  but  still  ocean  freight  rates  are  amazingly  low.  The 
question  of  economizing  power  and  that  of  economizing  time 
seem  sometimes  to  come  into  conflict.  The  sailing  vessel  is  the 
greatest  economizer  of  power,  but  it  is  not  economical  of  time. 

The  order  of  development  of  water  transportation  has  been 
described  as,  first,  the  potamic  stage  ;  second,  the  thalassic ; 
and,  third,  the  oceanic.  The  following  outline  indicates  roughly 
the  general  types  of  transportation  now  in  use. 

r  Potamic 
Water  J  Thalassic 


TRANSPORTATION 


I  Oceanic  f  Man  power 

(  Paths,  roads,  and  streets  -\  Animal  power 


Land  -t  Railways  [_  Mechanical  power 

[  Tramways 
I  Air 


238          PRINCIPLES  OF  POLITICAL  ECONOMY 

The  most  primitive  trade  routes  were  probably  paths  traversed 
by  human  beings  carrying  their  own  loads.  Beasts  of  burden 
were,  however,  utilized  very  early  for  this  purpose.  The  ac- 
counts of  early  explorers  in  Central  Africa  describe  the  great 
forest  as  penetrated  by  a  network  of  paths  running  from  one 
village  to  another,  so  that  a  traveler  could  cross  the  continent 
by  persistently  following  these  paths.  The  great  caravan  routes 
mentioned  above,  across  the  desert  and  open  country,  made 
use  of  animals  as  beasts  of  burden. 

Wheels.  A  wheeled  vehicle  is  a  great  advance  over  the 
carrying  of  loads  on  the  backs  either  of  men  or  of  animals.  In 
some  of  the  backward  districts  of  China,  porters  still  carry  huge 
loads,  and  it  is  amazing  what  loads  a  man  can  carry  who  has 
been  trained  to  it  all  his  life.  But  where  the  road  is  made 
suitable  for  wheeled  vehicles,  the  porter  can  haul  about  three 
times  as  much  on  wheels  as  he  can  carry.  On  a  paved  street 
or  a  macadamized  road  in  this  country  a  pair  of  good  horses 
will  haul  from  two  to  four  tons,  whereas  about  six  hundred 
pounds  is  a  load  for  a  pack  horse.  Even  on  the  common  dirt 
roads  of  the  country,  when  they  are  reasonably  well  kept  and 
not  muddy,  a  pair  of  horses  will  haul  from  a  ton  and  a  half 
to  two  tons. 

Most  people  use  roads  and  streets  more  than  they  use  rail- 
roads, though  it  is  difficult  to  say  that  one  is  more  important 
than  the  other.  They  are  all  so  interlocked  and  interdependent 
that  it  is  hard  to  treat  them  separately.  For  short  distances  we 
must  of  course  depend  upon  roads  and  streets,  using  the  rail- 
roads for  transportation  over  long  distances  and  the  hauling 
of  heavier  loads. 

Animal  power.  On  the  roads  and  streets  man  power  is  still 
used,  as  suggested  above,  in  some  backward  countries.  It  is 
cheap  only  when  labor  is  very  cheap.  A  man  can  live  on  much 
less  grain  than  is  required  to  feed  a  horse.  If  a  man  is  willing 
to  live  largely  on  a  grain  diet,  it  will  hardly  pay  him  to  keep  a 
horse  where  grain  is  very  scarce.  Where  the  population  is  so 


TRANSPORTATION  239 

dense  that  it  is  necessary  to  conserve  every  ounce  of  food,  and 
men  are  reduced  to  the  barest  necessities  of  life,  it  is  uneco- 
nomical to  use  animal  power  except  for  heavy  loads  which  are 
too  great  for  human  muscles.  Where  there  is  land  enough  to 
provide  food  not'  only  for  human  beings  'but  for  animals,  the 
use  of  animal  power  becomes  economical,  because  much  more 
work  can  be  done,  more  land  cultivated,  more  goods  trans- 
ported, and  thus  the  animals  can  be  fed  and  still  leave  more 
to  supply  human  needs  than- would  otherwise  be  produced. 

Mechanical  power.  There  is  a  tendency  at  the  present  time 
to  substitute  mechanical  power  for  animal  power  even  on  the 
roads  and  streets.  The  development  of  the  automobile  and  the 
auto  truck  is  opening  up  great  possibilities  in  this  direction.  It 
is  not  probable,  however,  that  mechanical  power  will  entirely 
displace  animal  power,  any  more  than  animal  power  could 
entirely  displace  human  power.  The  tendency  in  our  civilized 
communities  is  for  the  use  of  human  power  for  transportation 
purposes  to  be  confined  to  shorter  and  shorter  distances ;  carry- 
ing goods  from  the  grocer's  delivery  wagon  to  the  kitchen  door, 
carrying  coal  from  the  curbstone  to  the  cellar,  moving  goods 
within  warehouses,  etc.,  will  probably  continue  to  be  done  by 
human  muscles  for  some  time  to  come.  A  similar  development 
will  probably  take  place  with  respect  to  animal  power.  For  long 
distances  and  the  carrying  of  heavy  loads  the  auto  truck  will 
probably  prove  increasingly  economical,  but  for  short  distances 
the  horse  is  still  and  will  probably  continue  for  some  time  to  be 
more  economical.  The  economy  of  the  auto  truck,  however,  de- 
pends upon  the  character  of  the  roads.  With  the  common  dirt 
roads  which  formerly  prevailed  in  the  country  it  is  doubtful  if  it 
could  have  been  used  economically  even  if  it  had  been  developed. 

Better  tracks.  It  is  interesting  to  note  how  every  advance 
in  methods  of  transportation  seems  to  depend  upon  the  quality 
of  the  road  or  track.  Wheeled  vehicles  could  only  be  substi- 
tuted for  pack  saddles  when  there  were  roads  suitable  for 
wheeled  vehicles.  Well-kept  roads  and  paved  streets  are 


240 

necessary  before  mechanical  power  can  be  substituted  for  animal 
power  in  ordinary  hauling.  The  acme  of  track  building  is  the 
railway,  where  the  wheeled  vehicle  runs  on  steel  rails.  The 
friction  and  loss  of  power  between  the  wheel  and  the  track  is 
reduced  to  the  minimum.  In  a  similar  way  the  modern  loco- 
motive is  the  climax  of  the  development  of  mechanical  power. 
Thus  the  improvement  in  mechanical  devices  goes  hand  in 
hand  with  the  improvement  in  road  or  track.  Ever  since  the 
first  building  of  railways  and  the  use  of  locomotive  engines 
this  development  has  proceeded  hand  in  hand.  The  first  loco- 
motives were  small  and  crude  affairs  as  compared  with  the 
magnificent  engines  which  now  haul  our  freight  and  passenger 
trains.  The  magnificent  engines  of  to-day,  however,  could 
scarcely  run  on  the  old-fashioned  railway  track,  with  its  light 
iron  rails.  Improvement  in  the  manufacture  of  the  steel  rail 
has  had  to  go  hand  in  hand  with  the  improvement  of  the 
locomotive  engine. 

Railways.  It  may  seem  strange  to  young  people  to  be  told 
that  there  are  men  now  living  who  can  remember  when  there 
were  no  railways.  Such  men,  of  course,  are  now  somewhat  rare, 
but  the  fact  remains  that  the  present  age  of  the  railway  does 
not  exceed  the  span  of  a  reasonably  long  human  life.  The 
railway  mileage  of  the  world  has  increased  by  leaps  and  bounds. 
In  no  country  has  the  development  of  the  railway  kept  pace 
with  its  development  in  the  United  States,  though  in  propor- 
tion to  their  need  for  railway  transportation  England  and  Ger- 
many have  kept  close  behind  us.  Our  area  is  so  vast,  and  our 
people  have  been  spreading  so  rapidly  over  this  vast  area,  that 
a  great  demand  for  transportation  facilities  has  been  created. 
In  addition  we  have  had  an  abundance  of  material  for  their 
construction.  Moreover,  our  people  have  shown  a  great  deal 
of  initiative  and  enterprise  in  pushing  the  business.  In  some 
countries  this  spirit  of  enterprise  has  been  so  lacking  that  the 
governments  themselves  have  had  to  take  hold  of  the  matter 
and  build  the  roads  at  government  expense. 


TRANSPORTATION  241 

Public  or  private  railways.  The  problem  of  railway  man- 
agement, however,  has  been  a  very  difficult  one  in  every  coun- 
try. In  one  sense  the  railway  system  would  seem  to  belong 
to  the  general  system  of  streets,  roads,  and  highways.  The 
general  experience  of  mankind  has  shown  that  streets,  roads, 
and  highways  should  be  public  rather  than  private.  This  has 
led  to  the  assumption  that  railways  should  be  treated  similarly. 
There  is,  however,  this  important  difference.  On  the  streets, 
roads,  and  highways  private  individuals  use  their  own  vehicles, 
travel  freely,  and  go  and  come  when  they  please.  The  actual 
work  of  transportation,  therefore,  is  not  carried  on  by  the  public. 
This  method  would  be  impossible  on  a  railway.  The  trains  must 
run  on  schedule  time  and  under  a  well-administered  system ; 
otherwise  there  would  be  nothing  but  confusion  and  ineffi- 
ciency and  multitudinous  wrecks.  If  the  public  undertakes  to 
own  the  railways,  it  would  have  to  go  much  farther  than  it  does 
when  it  owns  the  streets  and  highways.  It  would  either  have 
to  operate  all  the  vehicles  (that  is,  trains)  or  lease  the  road  to 
a  single  company  which  would  have  the  exclusive  use  of  the 
tracks.  Obviously  even  two  independent  individuals  or  com- 
panies could  not  operate  trains  on  the  same  track.  There  are 
therefore  two  analogies  which  may  be  drawn  between  the  high- 
way system  and  the  railway  system.  Since  the  government 
owns  the  highways,  one  group  of  people,  reasoning  by  analogy, 
say  that  the  government  ought  to  own  the  railways.  On  the 
other  hand,  it  is  asserted  that  since  private  individuals  operate 
the  vehicles  that  are  used  on  the  highways,  and  the  govern- 
ment is  not  in  the  transportation  business  at  all,  a  similar  rule 
should  prevail  with  respect  to  railway  transportation  ;  private 
individuals  or  companies  should  do  the  hauling,  and  therefore 
own  the  railway.  In  this  country  we  have  followed  the  latter 
principle,  but  it  has  made  necessary  a  considerable  regulation 
of  the  companies  which  do  the  hauling.  A  third  possibility  is 
that  the  government  should  build  and  own  the  tracks  and  then 
lease  them  to  operating  companies. 


242          PRINCIPLES  OF  POLITICAL  ECONOMY 

Monopolistic  character  of  a  railway.  From  the  very  nature 
of  the  case  a  railway  must  be  operated  as  a  monopoly  or  quasi- 
monoply.  As  suggested  above,  it  would  be  impossible  for  even 
two  companies  to  run  trains  on  the  same  track  or  over  the 
same  railway  system,  unless  one  became  absolutely  subject  to 
the  administrative  rules  of  the  other.  This  quasi-monopolistic 
character  of  the  railway  has  given  the  management  more  control 
over  rates  than  individual  draymen,  freighters,  cabmen,  etc.  can 
exercise  over  freight  and  passenger  rates  in  the  vehicles  that 
are  operated  on  public  highways.  In  order  to  hold  in  check 
this  quasi-monopolistic  power  of  the  railway,  a  great  deal  of 
legislation  has  been  enacted  in  this  country,  beginning  with 
the  granger  laws  of  the  seventies  and  eighties  of  the  last  cen- 
tury and  culminating  in  the  Interstate  Commerce  Act  of  1887 
and  the  subsequent  development  of  the  powers  of  the  Interstate 
Commerce  Commission.  This  commission  now  has  power  to 
prescribe  rates  and  to  exercise  general  control  and  supervision 
over  the  administration  of  all  the  railways  of  the  country. 

Short-  and  long-distance  hauling.  In  several  countries,  such 
as  Germany,  Switzerland,  Australia,  and  others,  the  opposite 
alternative  has  been  chosen.  The  government  has  built  and 
continues  to  operate  the  railways.  In  Germany  it  was  primarily 
a  military  enterprise  ;  in  order  that  she  might  build  up  her  mili- 
tary power  and  be  able  to  concentrate  vast  armies  and  supply 
them  at  any  point,  she  needed  a  well-articulated  railway  system. 
In  this  respect  her  policy  resembled  that  of  the  Romans,  who 
were  great  road  builders  in  their  day.  Their  system  of  roads 
enabled  them  to  march  their  armies  rapidly  from  one  part  of 
the  Empire  to  another,  to  concentrate  wherever  concentration 
was  needed,  and  thus  to  outmaneuver  their  enemies. 

As  to  the  effects  of  the  two  systems  on  peaceful  commerce, 
there  are  many  different  opinions.  In  some  respects  freight 
rates  are  more  favorable  in  Germany  than  in  the  United  States  ; 
in  others  they  are  much  more  favorable  in  the  United  States.  No 
railway  system  in  the  world  compares  with  that  of  the  United 


TRANSPORTATION  243 

States  in  the  cheapness  and  swiftness  of  long-distance  freight. 
Our  railways,  however,  have  given  comparatively  little  attention 
to  local  freight.  In  the  efficiency  and  cheapness  with  which 
local  freight  is  handled,  they  are  far  behind  the  railroads  not 
only  of  Germany,  where  the  government  owns  and  operates  the 
roads,  but  also  of  England,  where  they  are  operated  by  private 
companies.  The  difference  is  probably  not,  therefore,  to  be 
accounted  for  on  the  ground  of  public  or  private  ownership.  In 
a  densely  populated  country,  where  the  distances  are  never  very 
great,  it  would  be  quite  natural  that  short-distance,  or  local, 
freight  should  form  a  large  part  of  the  business  of  the  railroad  ; 
whereas  in  a  country  of  such  vast  expanse  as  ours  it  would  be 
equally  natural  that  long-distance  freight  should  form  the  chief 
part  of  the  railroad  business.  Each  railway  system,  therefore, 
tends  to  specialize  in  that  field  where  its  chief  business  lies. 

Arguments  against  both  sides.  No  final  conclusion  is  possi- 
ble as  to  the  relative  merits  of  public  and  private  management. 
As  Sir  Roger  de  Coverley  was  in  the  habit  of  saying,  "  Much 
might  be  said  on  both  sides."  Each  side  has  its  partisans,  and 
each  partisan  seems  peculiarly  unable  to  appreciate  the  weak- 
nesses of  his  own  side  and  the  strong  points  on  the  opposite 
side.  In  reading  these  arguments  one  gets  the  impression  that 
there  is  very  little  to  be  said  in  favor  of  either,  but  much 
that  can  be  said  against  both.  The  arguments  against  private 
ownership  and  operation  are  based  mainly  on  the  monopolistic 
character  of  the  railroad  business,  the  rapacity  of  railroad  man- 
agers, and  the  general  distrust  of  "  big  business."  The  argu- 
ments against  public  ownership  and  operation  are  based  mainly 
upon  the  inefficiency  of  public  business,  the  danger  that  politics 
rather  than  business  needs  will  determine  rates  and  other  details 
of  the  business,  and  the  general  distrust  of  the  politician. 

These  considerations  might  very  properly  convince  one  that 
the  same  system  is  not  necessarily  the  best  for  all  countries. 
In  a  country  which  is  dominated  by  autocratic  and  military 
standards,  where  business  is  contemptuously  spoken  of  as 


244          PRINCIPLES  OF  POLITICAL  ECONOMY 

"  shopkeeping,"  where  government  service  attracts  a  better 
class  of  men  than  business  attracts,  and  where  men  are  chosen 
for  high  positions  not  because  of  their  talkativeness  or  popu- 
larity, but  because  of  their  knowledge  and  efficiency,  the  objec- 
tions to  public  ownership  and  operation  are  weak  and  those 
against  private  ownership  and  operation  are  weighty.  In  a 
country,  however,  which  is  dominated  by  democratic  ideals, 
where  business  and  all  honest  occupations  have  always  been 
regarded  as  just  as  honorable  as  government  or  military  service, 
where,  on  the  whole,  business  attracts  a  better  class  of  men 
than  politics,  and  where  men  are  chosen  for  high  public  posi- 
tions mainly  on  the  ground  of  their  ability  to  make  stump 
speeches  rather  than  on  the  ground  of  their  knowledge  and 
efficiency,  the  objections  to  government  ownership  and  opera- 
tion are  very  strong,  and  those  against  private  ownership  and 
operation  are  relatively  weak.  There  is  a  strong  probability, 
however,  that  the  persuasive  talkers  will  be  able  to  enlarge  their 
powers,  at  the  expense  of  the  efficient  doers,  by  persuading  the 
voters  to  intrust  more  and  more  power  to  them,  the  talkers. 


CHAPTER  XX 
MERCHANDISING 

Personal  utility.  In  a  previous  chapter  it  was  pointed  out 
that  three  kinds  of  utility  are  produced  by  human  industry,  — 
form  utility,  place  utility,  and  time  utility.  It  would  be  possible, 
if  one  cared  to  draw  somewhat  finer  distinctions,  to  speak  of 
personal  utility  as  a  special  phase  of  place  utility ;  or,  on  the 
other  hand,  personal  utility  could  be  named  as  a  fourth  kind. 
When  an  object  is  transferred  from  a  person  who  has  no  use 
for  it  to  a  person  who  has  a  use  for  it,  its  utility,  or  power  to 
satisfy  desires,  is  increased  by  the  transfer,  just  as  truly  as 
though  it  were  transferred  from  a  locality  where  it  is  not 
needed  to  a  locality  where  it  is  needed. 

There  is  an  ancient  fallacy  to  the  effect  that  someone  must 
gain  and  someone  must  lose  in  every  trade.  This  fallacy  has 
been  exploded  so  often  that  it  hardly  seems  necessary  to 
repeat  the  process  here.  Two  farmers  may  trade  horses  and 
both  gain.  A  wool  grower  who  has  a  surplus  of  wool  and  a 
shoemaker  who  has  a  surplus  of  shoes  may  exchange  products 
to  the  advantage  of  both.  A  boy  who  has  a  surplus  of  mar- 
bles but  a  deficit  of  taffy  might  advantageously  exchange 
some  of  his  surplus  marbles  for  taffy,  carrying  on  the  exchange 
with  another  boy  who  had  a  surplus  of  taffy  but  a  deficit  of 
marbles.  By  this  process  the  personal  utility  of  both  marbles 
and  taffy  would  be  increased. 

Merchandising  may  be  productive  of  utility.  If  it  is  agreed 
that  the  power  of  goods  to  satisfy  wants  is  increased  when 
those  goods  get  into  the  possession  of  the  people  who  really 
need  them,  it  ought  not  to  be  difficult  to  see  that  the  individual 

245 


246          PRINCIPLES  OF  POLITICAL  ECONOMY 

who  facilitates  this  process  is  a  productive  individual ;  that  is, 
his  work  results  in  increased  utility.  Even  if  we  leave  trans- 
portation and  the  storing  of  goods  out  of  account  for  the 
present,  and  merely  consider  the  transfer  of  goods  from 
one  person  to  another  in  the  same  locality,  we  shall  find  that 
unless  there  were  merchants  or  mercantile  houses  the  various 
producers  would  find  difficulty  in  making  the  necessary  ex- 
changes. The  farmer  with  a  surplus  of  wheat  might  have 
some  difficulty  in  finding  a  shoemaker  who  wanted  wheat  and 
was  willing  to  exchange  shoes  for  wheat.  Under  a  highly 
developed  mercantile  system  a  farmer  can  always  find  buyers 
for  his  wheat.  He  can  also  find  a  shoe  store  where  he  can  buy 
shoes,  a  clothing  store  where  he  can  buy  clothing,  and  so  on. 

These  men  who  specialize  in  the  mercantile  pursuits  are 
sometimes  called  middlemen,  and  it  is  not  difficult  to  see  that 
they  are  not  only  exceedingly  useful  but  in  some  cases  abso- 
lutely necessary.  It  may  sometimes  happen  that  too  many 
middlemen  intervene  between  the  producer  and  the  consumer ; 
but  some  middlemen  are  absolutely  necessary  unless  the  pro- 
ducer will  undertake  to  peddle  his  products  around  among 
consumers,  or  unless  the  consumers  will  undertake  to  search 
for  producers  who  have  for  sale  exactly  what  they,  the  con- 
sumers, desire  to  purchase.  An  immense  amount  of  time  and 
trouble  is  saved  when  every  producer  can  sell  directly  to  a 
middleman  and  go  on  about  his  work  of  production,  while  at 
the  same  time  every  consumer  can  purchase  exactly  what  he 
wants  from  some  merchant. 

The  middleman  as  a  timesaver.  Generally  speaking,  it  will 
be  observed  that  in  any  community  where  the  average  person 
considers  his  time  to  be  valuable,  there  are  a  great  many  mid- 
dlemen intervening  between  producers  and  consumers,  and  very 
little  direct  marketing.  In  a  community,  however,  where  wages 
and  incomes  are  low  and  the  average  person  finds  his  time  to 
be  of  very  little  value,  comparatively  few  middlemen  intervene 
between  producer  and  consumer,  and  there  is  a  great  deal  of 


MERCHANDISING  247 

direct  bartering  between  producer  and  consumer.  The  open 
market  place,  where  producers  and  consumers  meet,  flourishes 
in  communities  of  the  latter  type  but  not  in  communities  of 
the  former  type. 

There  is  an  old  adage  that  time  is  money.  Where  time  is 
valuable,  it  is  economized  ;  where  it  is  of  little  value,  it  is  not 
economized.  Where  the  average  householder  considers  her 
time  valuable,  she  does  not  care  to  spend  much  time  market- 
ing and  dickering  with  producers  who  bring  their  stuff  to 
market.  She  prefers  to  market  by  telephone.  This  is  a  great 
saving  of  time,  but  it  is  generally  expensive  in  terms  of  money. 
She  is  literally  paying  somebody  else  to  do  for  her  that  which 
she  might  do  for  herself  if  she  cared  to  go  to  market  and 
deal  directly  with  the  producers.  Similarly,  where  the  pro- 
ducer considers  his  time  valuable,  he  would  prefer  to  sell  his 
product  in  bulk  to  some  middleman  rather  than  to  spend 
his  time  dickering  with  consumers  and  selling  his  product  in 
small  lots.  This  system  of  direct  marketing  saves  money,  it  is 
true,  but  it  wastes  time  ;  the  system  of  indirect  marketing  saves 
time  but,  in  a  sense,  wastes  money.  The  problem  in  economy 
which  every  producer  and  every  consumer  must  decide  for 
himself  is  whether  his  time  is  worth  as  much  as  the  money 
which  he  might  otherwise  save. 

The  peasant  women  of  certain  overcrowded  countries,  who 
are  unable  to  do  farm  work  and  have  very  little  else  in  the 
way  of  remunerative  work  which  they  can  do,  find  going  to 
market  a  means  of  saving  money.  They  can  sell  directly 
to  the  consumers  and  cut  out  middlemen's  costs  and  profits. 
Since  they  consider  their  time  as  worth  practically  nothing, 
every  penny  which  they  can  save  in  this  way  adds  so  much  to 
the  family  income.  The  American  farmer,  with  a  somewhat 
higher  standard  of  living,  and  the  farmer's  wife,  who  considers 
her  time  as  worth  something,  if  not  for  earning  money  by 
remunerative  work,  at  least  for  housekeeping  or  self-cultivation, 
refuses  to  spend  her  time  in  this  way.  Therefore  it  is  very 


248          PRINCIPLES  OF  POLITICAL  ECONOMY 

difficult  in  this  country  to  maintain  a  system  of  direct  market- 
ing. It  is  the  belief,  however,  of  many  students  of  the  problem 
that  the  Americans  have  gone  too  far  in  the  direction  of 
saving  time,  —  so  far,  in  fact,  as  to  waste  more  money  than 
necessary  in  middlemen's  costs  and  profits. 

Marketing  sometimes  a  social  function.  Another  factor 
enters  into  the  success  of  public  markets,  where  producer  and 
.consumer  meet.  In  those  countries  where  the  system  still 
prevails,  going  to  market  has  become  a  social  function.  The 
market  place  is  the  place  where  citizens  meet  and  where  the 
women  make  their  social  calls  and  pay  their  social  obligations. 
This  phase  of  the  question  has  played  a  very  important  part 
in  history.  The  Roman  Forum,  for  example,  was  simply  the 
market  place,  in  which  the  farmers  from  the  surrounding 
country  and  the  people  of  the  city  of  Rome  met,  primarily  for 
purposes  of  exchange  and  secondarily  for  purposes  of  social 
intercourse  and  political  discussion.  The  latter  functions  gradu- 
ally displaced  the  former,  and  the  Roman  Forum  gradually 
became  the  center  of  Roman  politics  and  eventually  the  center 
of  the  world.  The  Olympic  games,  which  were  for  many 
centuries  the  center  of  Greek  life,  developed  in  connection 
with  a  fair  which  was  held  for  the  exchange  of  products. 
While  the  Greek  people  were  busy  with  their  exchanges 
the  young  men  took  part  in  athletic  and  intellectual  contests ; 
eventually  these  contests  became  the  chief  feature,  and  the 
mercantile  function  almost  disappeared  from  sight. 

The  social  function  of  going  to  market  has  been  revived  in 
a  number  of  ways  in  recent  times.  Great  department  stores, 
in  order  to  attract  trade,  especially  that  of  ladies  who  have 
time  for  social  diversion,  have  introduced  the  paraphernalia  of 
the  drawing-room,  with  pink  teas  and  other  accessories.  They 
are  deliberately  striving  to  make  afternoon  shopping  a  social 
diversion,  thus  restoring,  in  the  field  of  the  marketing  of  frills, 
some  of  the  features  which  originally  developed  in  connection 
with  the  marketing  of  the  necessaries  of  life. 


MERCHANDISING  249 

Buying    large    quantities   and    selling    in    small    parcels. 

Another  very  important  function  performed  by  the  mercantile 
house  is  that  of  receiving  products  in  large  quantities,  such  as 
are  convenient  for  the  producer  to  sell,  and  dividing  them  up 
into  small  parcels,  such  as  are  convenient  for  the  consumer  to 
buy.  This  breaking  up  into  small  parcels  is  a  work  of  utility ; 
it  meets  the  convenience  of  both  producer  and  consumer. 
The  convenience  of  the  producer  is  met  by  his  ability  to  sell 
in  bulk ;  the  convenience  of  the  consumer  is  met  by  his  ability 
to  buy  in  small  parcels.  This  may,  without  doing  violence  to 
our  language,  be  called  a  kind  of  form  utility.  The  goods  are 
bought  in  one  form  and  sold  in  another.  There  is  a  certain 
analogy  between  this  process  of  breaking  goods  up  into  small 
parcels  and  the  process  of  manufacturing,  in  which  the  forms 
of  goods  are  changed  in  other  ways. 

Storing  goods.  One  of  the  most  important  functions  of  the 
mercantile  class,  however,  is  that  of  storing  goods.  In  fact, 
it  is  still  customary  to  speak  of  certain  mercantile  houses  as 
stores.  The  storing  of  goods,  of  course,  produces  time  utility. 
They  are  kept  from  a  point  in  time  when  they  are  not  espe- 
cially needed  until  a  time  when  they  are  especially  needed. 
Their  utility  is  thus  increased.  This  function  of  storing  goods 
is  particularly  important  in  the  case  of  goods  which  are  pro- 
duced by  a  seasonal  industry,  such  as  agriculture.  The  wheat 
is  harvested  during  one  period  of  the  year,  but  needs  to  be 
consumed  during  the  entire  year.  Unless  someone  were  ready 
to  store  this  product,  it  would  have  to  be  used  very  inefficiently 
at  one  period  of  the  year,  and  there  would  be  a  scarcity  at 
another  period. 

Utility  of  storing  without  monopolizing.  Contrary  to  a  cer- 
tain popular  belief,  the  effect  of  storing  vast  quantities  of  farm 
products  in  warehouses  is  beneficial  rather  than  otherwise. 
No  speculator  or  warehouse  owner  would  have  any  motive  for 
storing  products  except  that  of  getting  a  higher  price  later  on. 
He  could  not  get  a  higher  price  later  on  unless  the  goods 


250          PRINCIPLES  OF  POLITICAL  ECONOMY 

were  scarcer  later  on.  If  they  are  scarcer  later  on,  it  is  very 
much  to  the  interest  of  society  that  they  be  stored  rather  than 
consumed  at  once.  At  the  present  time,  May,  1917,  when 
prices  are  very  high  anyway,  and  it  is  found  that  a  great  deal 
of  grain  is  being  stored  up,  there  naturally  develops  a  certain 
popular  dissatisfaction.  Being  shortsighted,  we  do  not  appre- 
ciate what  is  likely  to  be  our  situation  several  months  hence. 
The  only  thing  we  see  is  that  prices  are  now  distressingly 
high.  We  see  this  in  connection  with  another  fact,  namely, 
that  large  quantities  of  wheat  are  being  stored.  We  think, 
naturally  enough,  that  if  that  wheat  were  taken  out  of  storage 
and  sold  at  once,  prices  would  not  be  so  high  at  the  present 
moment.  If,  however,  we  were  a  little  more  farsighted,  we 
should  look  ahead  and  consider  what  the  situation  would  be, 
say  in  July  of  the  present  year.  If  wheat  is  going  to  be  more 
abundant  then  than  now,  the  price  will  fall.  If  that  were  the 
expectation,  nobody  would  be  willing  to  store  a  single  bushel 
of  wheat  until  that  time.  Everybody  would  want  to  sell  his 
wheat  very  soon.  If  those  who  are  in  a  position  to  judge  be- 
lieve that  wheat  will  be  scarcer  in  July  than  in  May,  and  the 
price  therefore  higher,  they  find  it  to  their  interest  to  store  up 
these  products  and  hold  them.  If  they  are  correct  in  their 
anticipation,  it  is  also  very  important  for  society  at  large  that 
they,  or  somebody,  should  store  up  wheat ;  otherwise  we  should 
consume  wastefully  this  month  and  go  hungry  later  on.  It 
ought  not  to  take  very  much  forethought  or  reasoning  power 
to  understand  this.  It  is,  however,  a  sad  commentary  on  the 
shortsightedness  of  many  of  our  people,  and  even  of  men  in 
high  political  positions,  that  this  is  so  imperfectly  understood 
and  that  we  are  so  generally  resentful  toward  those  who  are 
performing  this  important  function  of  storing. 

Another  fact  which  should  be  taken  into  consideration  is 
that,  formerly,  large  numbers  of  people,  both  producers  and 
consumers,  did  their  own  storing,  whereas  at  the  present  time 
that  work  is  turned  over  to  a  special  group  of  men  who  own 


MERCHANDISING  251 

elevators,  cold-storage  warehouses,  and  other  storage  facilities. 
In  a  less  highly  organized  state  of  society  many  farmers 
stored  grain  in  their  own  bins,  and  potatoes,  fruit,  and  vege- 
tables in  their  own  cellars.  At  the  same  time  many  con- 
sumers bought  supplies  in  advance  and  stored  them  in  their 
own  cellars.  At  the  present  time  comparatively  few  farmers 
hold  their  products,  finding  it  cheaper  to  sell  them  as  soon  as 
produced  than  to  build  and  maintain  their  own  storehouses 
and  run  their  own  risk  of  loss  or  deterioration  of  the  prod- 
ucts. Moreover,  consumers  have  generally  got  out  of  the 
habit  of  buying  supplies  in  advance  and  keeping  them  stored 
until  needed,  finding  it  cheaper  to  order  supplies  as  they 
are  needed,  depending  upon  other  people  to  do  the  storing. 
While  both  producer  and  consumer  are  turning  this  work  over 
to  a  special  class,  they  must  not  forget  that  the  only  motive 
which  this  special  class  has  for  doing  this  special  work  is  the 
hope  of  a  profit.  If  they  can  make  a  profit  and  still  furnish 
the  service  cheaper  than  producers  and  consumers  can  furnish 
it  for  themselves,  they  have  earned  their  profit. 

Cornering,  or  monopolizing,  is  destructive  of  utility.  We 
should  be  careful,  however,  to  distinguish  between  storing  for 
sale  on  a  competitive  market  and  monopolizing  for  sale  on 
what  is  known  as  a  cornered  market.  If  there  were  collusion 
among  all  those  who  own  warehouses  or  who  are  in  a  position 
to  store  products,  —  an  agreement  to  control  the  supply  and  fix 
prices  artificially,  —  there  would  be  a  real  grievance,  and  the 
individuals  who  are  guilty  of  such  a  practice  should  of  course 
be  very  severely  dealt  with.  But  if  we  can  once  satisfy  our- 
selves that  there  is  no  collusion  or  attempt  at  monopolization, 
that  the  products  are  being  stored  for  sale  on  a  competitive 
market,  we  can  rest  perfectly  easy  in  our  minds,  because  no 
one  could  make  any  money  by  storing  in  this  way  unless  it 
were  genuine  social  service  to  do  so.  By  social  service,  of 
course,  we  do  not  mean  philanthropic  service,  but  merely 
useful  work. 


252          PRINCIPLES  OF  POLITICAL  ECONOMY 

Standardization.  Another  very  important  function  performed 
by  the  mercantile  class  is  what  is  known  as  the  classification 
or  standardization  of  goods.  The  producer  of  farm  products 
especially  cannot  produce  goods  of  uniform  kind  and  quality. 
On  every  apple  tree  there  will  be  apples  of  various  grades,  and 
in  every  large  orchard  likewise.  In  every  poultry  yard  there 
will  be  fowls  of  different  qualities.  The  consumer  who  tried  to 
purchase  directly  from  the  farm  might  not  find  exactly  the 
grade  or  quality  which  he  desired.  When  the  farmer  sells  his 
products  in  bulk,  the  middleman  will  frequently  classify  or 
grade  them  into  a  large  number  of  grades.  Take  such  a  simple 
product,  for  example,  as  broilers.  It  is  very  difficult  for  one 
poultryman  to  produce  a  large  number  of  broilers  all  of  the 
same  size,  weight,  quality,  and  general  condition.  A  hotel  or 
restaurant,  however,  wishes  to  treat  all  customers  alike.  It  does 
not  wish  to  buy  broilers  in  a  nondescript,  or  ungraded,  mass.  If 
it  did  so,  one  customer  would  get  one  kind  of  dish  and  another 
customer  another  kind,  varying  in  size  and  quality.  This  would 
produce  dissatisfaction.  A  dealer  buys  broilers  from  a  large 
number  of  poultrymen  and  classifies  them  very  minutely. 
There  are  said  to  be  over  one  hundred  different  grades  and 
classes.  Each  hotel  and  restaurant,  and  every  private  con- 
sumer, can  get  from  such  a  dealer  exactly  what  he  wants. 
Multitudes  of  other  illustrations  could  be  given,  but  enough 
has  been  said  to  show  that  merchandising  is  a  very  important 
factor  in  the  economy  of  human  energy  and  the  promotion  of 
national  prosperity. 

Deception  always  destruction.  It  is  quite  certain,  however, 
that  certain  practices  will  grow  up  in  connection  with  mer- 
chandising which  are  reprehensible.  The  ancient  Greeks  re- 
garded Hermes,  or  Mercury,  not  only  as  the  herald  of  the 
gods  but  also  as  the  god  of  boundaries,  markets,  and  weights  and 
measures,  and  as  the  special  patron  of  merchants,  gamblers, 
and  thieves.  There  is  probably  no  other  branch  of  human  in- 
dustry or  business  which  lends  itself  so  easily  to  deception  and 


MERCHANDISING  253 

adulteration,  and  which  furnishes  such  temptations  to  high- 
pressure  advertising  and  salesmanship.  The  old  adage  that 
honesty  is  the  best  policy  is  doubtless  appreciated  by  merchants 
of  the  better  class,  but  unfortunately  there  are  always  a  good 
many  men  who  are  doing  some  kind  of  merchandising,  to  whom 
this  adage  seems  more  theoretical  than  practical.  The  arts  of  per- 
suasion are  developed  to  a  high  degree  of  proficiency,  and  pass 
easily  over  into  the  arts  of  deception.  The  justification  given 
is  generally  summed  up  in  the  words,  "  business  is  business. " 
It  is  not  necessary  to  present  any  arguments  to  show  that  de- 
ception contributes  nothing  to  national  prosperity.  What  one 
gains  by  deception,  someone  else  necessarily  loses.  It  is  prob- 
ably this  phase  of  the  question  that  has  led  to  the  hasty  con- 
clusion, which  is  far  too  widely  accepted,  that  somebody  always 
loses  in  a  trade.  That  general  conclusion  was  combated  at  the 
beginning  of  this  chapter.  In  so  far  as  trading  takes  the  form 
of  deception,  however,  the  conclusion  is  entirely  justified. 

Advertising.  Advertising  occupies  a  prominent  place  among 
the  forms  in  which  the  art  of  persuasion  is  carried  to  a  high 
state  of  development  in  modern  times.  To  what  extent  adver- 
tising is  economically  justified  has  been  a  difficult  question 
and  must  remain  so.  Advertising  is  sometimes  educational. 
The  individual  sometimes  learns  from  advertisements  where 
he  can  get  something  which  he  really  wants  and  has  wanted 
for  a  long  time.  Without  the  advertisement  he  might  have 
found  difficulty  in  getting  it.  This  applies,  however,  mainly  to 
new  products  that  have  recently  been  put  upon  the  market. 
One  scarcely  needs  an  advertisement  to  tell  one  of  the  exist- 
ence of  soap  or  codfish,  or  to  acquaint  one  with  the  fact  that 
such  things  are  to  be  purchased  at  stores.  In  many  cases  of 
this  kind  the  only  effect  of  advertising  is  to  persuade  the  con- 
sumer to  use  one  man's  product  rather  than  another's.  One 
producer  realizes  that  if  he  does  not  advertise,  consumers  may 
buy  the  other  man's  product.  The  other  man  is  then  com- 
pelled to  advertise  in  order  to  defend  himself  against  the  first 


254          PRINCIPLES  OF  POLITICAL  ECONOMY 

advertiser,  and  thus  it  becomes  a  race,  or  contest,  to  get  the 
customer's  trade,  and  no  addition  whatever  is  made  to  the 
national  wealth  or  to  the  well-being  of  society.  It  is  not 
improbable  that  eventually  the  public  will  exercise  its  authority 
and  use  its  power  of  compulsion  to  limit  or  redirect  the  adver- 
tising business.  This,  however,  would  be  a  somewhat  dangerous 
experiment,  because  such  public  authority  would  have  to  be 
exercised  by  public  officers.  The  worst  forms  of  advertising 
are  not  found  among  merchants  but  among  candidates  for 
public  office.  The  man  who  has  succeeded  in  getting  elected 
to  office  by  campaigning,  which  is  a  kind  of  advertising,  is 
not  necessarily  the  best  man  to  decide  upon  what  is  good  and 
what  is  bad  advertising  either  in  political  campaigning  or  in 
merchandising. 


CHAPTER  XXI 

PERSONAL  AND  PROFESSIONAL  SERVICE 

Causing  productivity  in  others.  Falstaff  said,  "  I  am  not 
only  witty  in  myself,  but  the  cause  that  wit  is  in  other  men." 
There  are  many  men  and  women  in  every  community  who  are 
not  directly  producing  wealth,  but  who  are  the  cause  of  pro- 
ductivity in  others.  The  teacher  who  trains  students  in  the 
productive  arts  is,  to  say  the  least,  a  cause  of  productivity,  and 
becomes  a  contributor  to  national  prosperity.  The  singer,  the 
poet,  and  the  artist  who  inspire  to  strenuous  action  and  noble 
deeds  likewise  contribute  their  share  to  the  greatness  of  the 
nation.  The  military  band  is  a  part  of  the  fighting  strength  of 
the  army,  even  though  its  members  never  handle  a  destructive 
weapon  of  any  kind. 

The  teacher,  the  preacher,  the  musician,  the  poet,  and  the 
artist,  however,  sometimes  forget  their  function  in  a  great 
nation  and  at  times  seem  almost  to  imagine  that  they  are  the 
objects  for  which  the  nation  exists.  At  any  rate  they  have 
been  known  to  go  so  far  as  to  resent  the  idea  that  they  have  a 
purpose  .beyond  that  of  contributing  to  knowledge  for  its  own 
sake  or  art  for  its  own  sake. 

The  social  function  of  art,  religion,  etc.  Quite  different  was 
the  attitude  of  a  great  French  artist  when  he  found  his  country 
in  the  throes  of  the  life-and-death  struggle  which  began  with 
the  invasion  of  1914.  Speaking  before  a  gathering  of  French 
artists,  he  said  that  in  that  crisis  no  art  would  be  tolerated 
"  which  was  not  noble,  robust,  proud,  and  an  inciter  of  high 
thoughts  and  delicate  sentiments  —  an  art  of  heroic  joy." 
Facing  the  future,  he  continued  :  "  You  would  not  tolerate  any- 
thing less  to-day.  Then  why  should  you  tolerate  anything  less 

255 


256          PRINCIPLES  OF  POLITICAL  ECONOMY 

hereafter,  in  that  to-morrow  when  our  duties  shall  be  changed  ?  " 
Here  was  a  full  acceptance  of  the  view  that  art  has  an  end 
beyond  itself  and  is  not  its  own  excuse  for  being. 

Government.  The  officers  of  the  government  who  preserve 
order  and  protect  lives  and  property  contribute  a  large  share 
to  national  prosperity.  An  army,  whose  business  may  seem  to 
be  destruction  rather  than  production,  by  protecting  against 
invasion  from  without  and  insurrection  and  disorder  from 
within  may  be  an  indispensable  factor  in  prosperity. 

It  is  of  course  possible  to  have  too  many  so-called  non- 
producers,  not  only  in  the  army  but  in  public  offices  of 
different  kinds,  as  well  as  in  the  various  talking  and  ornamen- 
tal professions.  The  work  of  the  soldier,  for  example,  is  one  of 
the  most  honorable  of  all  professions  so  long  as  national 
defense  is  necessary ;  but  even  the  professional  soldier  himself 
will  generally  agree  that  it  would  be  an  excellent  thing  if  war 
could  be  eliminated  and  the  work  of  the  soldier  made  unneces- 
sary. The  same  reasoning  may  be  applied  to  many  other 
occupations.  No  work  is  more  beneficent  and  honorable  than 
that  of  the  physician  ;  but  every  physician,  if  he  is  worthy 
of  the  name,  is  working  for  the  elimination  or  prevention  of 
disease.  If  it  were  possible  to  carry  this  work  to  completion, 
it  would  greatly  reduce  the  need  for  physicians.  Litigation 
among  the  citizens  of  the  nation  is,  so  far  as  it  goes,  almost 
as  wasteful  as  war  between  nations.  If  it  could  be  eliminated, 
it  would  greatly  reduce  the  demand  for  lawyers.  An  army  of 
very  able  and  talented  men  would  thus  be  released  for  other 
kinds  of  work  for  which  the  need  persists.  The  best  lawyers, 
like  the  soldiers  and  physicians,  frankly  recognize  this  and  are 
willing  to  work  to  reduce  the  amount  of  litigation. 

Productive  and  unproductive  labor.  Economists  have  gener- 
ally recognized  a  distinction  between  productive  and  unproduc- 
tive labor,  but  they  have  not  always  agreed  as  to  the  line  of 
division.  Adam  Smith  1  wrote  : 

1  The  Wealth  of  Nations,  Vol.  I,  pp.  332-334.  Clarendon  Press,  Oxford,  1880. 


PERSONAL  AND  PROFESSIONAL  SERVICE       257 

There  is  one  sort  of  labor  which  adds  to  the  value  of  the  subject  upon 
which  it  is  bestowed :  there  is  another  which  has  no  such  effect.  The  for- 
mer, as  it  produces  a  value,  may  be  called  productive ;  the  latter,  unproduc- 
tive labor.  Thus  the  labor  of  a  manufacturer  adds,  generally,  to  the  value 
of  the  materials  which  he  works  upon,  that  of  his  own  maintenance,  and  of 
his  master's  profit.  The  labor  of  a  menial  servant,  on  the  contrary,  adds  to 
the  value  of  nothing.  Though  the  manufacturer  has  his  wages  advanced 
to  him  by  his  master,  he,  in  reality,  costs  him  no  expense,  the  whole  value 
of  those  wages  being  generally  restored,  together  with  a  profit,  in  the  im- 
proved value  of  the  subject  upon  which  his  labor  is  bestowed.  But  the 
maintenance  of  a  menial  servant  never  is  restored.  A  man  grows  rich  by 
employing  a  multitude  of  manufactures :  he  grows  poor  by  maintaining  a 
multitude  of  menial  servants.  The  labor  of  the  latter,  however,  has  its 
value,  and  deserves  its  reward  as  well  as  that  of  the  former.  But  the  labor 
of  the  manufacturer  fixes  and  realises  itself  in  some  particular  subject  or 
vendible  commodity,  which  lasts  for  some  time  at  least  after  that  labor  is 
past.  It  is,  as  it  were,  a  certain  quantity  of  labor  stocked  and  stored  up  to 
be  employed,  if  necessary,  upon  some  other  occasion.  That  subject,  or, 
what  is  the  same  thing,  the  price  of  that  subject,  can  afterwards,  if  neces- 
sary, put  into  motion  a  quantity  of  labor  equal  to  that  which  had  originally 
produced  it.  The  labor  of  the  menial  servant,  on  the  contrary,  does  not  fix 
or  realise  itself  in  any  particular  subject  or  vendible  commodity.  His  serv- 
ices generally  perish  in  the  very  instant  of  their  performance,  and  seldom 
leave  any  trace  or  value  behind  them,  for  which  an  equal  quantity  of  service 
could  afterwards  be  procured. 

The  labor  of  some  of  the  most  respectable  orders  in  society  is,  like  that 
of  menial  servants,  unproductive  of  any  value,  and  does  not  fix  or  realise 
itself  in  any  permanent  subject,  or  vendible  commodity,  which  endures 
after  that  labor  is  past,  and  for  which  an  equal  quantity  of  labor  could 
afterwards  be  procured.  The  sovereign,  for  example,  with  all  the  officers 
both  of  justice  and  war  who  serve  under  him,  the  whole  army  and  navy, 
are  unproductive  laborers.  They  are  the  servants  of  the  public,  and  are 
maintained  by  a  part  of  the  annual  produce  of  the  industry  of  other  people. 
Their  service,  how  honorable,  how  useful,  or  how  necessary  soever,  produces 
nothing  for  which  an  equal  quantity  of  service  can  afterwards  be  procured. 
The  protection,  security,  and  defence  of  the  commonwealth,  the  effect  of 
their  labor  this  year,  will  not  purchase  its  protection,  security  and  defence 
for  the  year  to  come.  In  the  same  class  must  be  ranked  some  both  of  the 
gravest  and  most  important,  and  some  of  the  most  frivolous  professions : 
churchmen,  lawyers,  physicians,  men  of  letters  of  all  kinds ;  players,  buf- 
foons, musicians,  opera-singers,  opera-dancers,  etc.  The  labor  of  the  meanest 


258          PRINCIPLES  OF  POLITICAL  ECONOMY 

of  these  has  a  certain  value,  regulated  by  the  very  same  principles  which 
regulate  that  of  every  other  sort  of  labor,  and  that  of  the  noblest  and  most 
useful,  produces  nothing  which  could  afterwards  purchase  or  procure  an 
equal  quantity  of  labor.  Like  the  declamation  of  the  actor,  the  harangue 
of  the  orator,  or  the  tune  of  the  musician,  the  work  of  all  of  them  perishes 
in  the  very  instant  of  its  production. 

Both  productive  and  unproductive  laborers,  and  those  who  do  no  labor 
at  all,  are  all  equally  maintained  by  the  annual  produce  of  the  land  and 
labor  of  the  country.  This  produce,  how  great  soever,  can  never  be  infinite, 
but  must  have  certain  limits.  According,  therefore,  as  a  smaller  or  greater 
proportion  of  it  is  in  any  one  year  employed  in  maintaining  unproductive 
hands,  the  more  in  the  one  case  and  the  less  in  the  other  will  remain  for 
the  productive,  and  the  next  year's  produce  will  be  greater  or  smaller  ac- 
cordingly ;  the  whole  annual  produce,  if  we  except  the  spontaneous 
productions  of  the  earth,  being  the  effect  of  productive  labor. 

John  Stuart  Mill1  makes  use  of  the  same  distinction  in  the 
following  paragraphs,  though  he  modifies  it  so  as  to  allow  for 
labor  which  is  mediately,  or  indirectly,  productive. 

LABOR  IS  INDIRECTLY  AS  WELL  AS  DIRECTLY 
PRODUCTIVE 

I  shall  therefore,  in  this  treatise,  when  speaking  of  wealth,  understand 
by  it  only  what  is  called  material  wealth,  and  by  unproductive  labor  only 
those  kinds  of  exertion  which  produce  utilities  embodied  in  material  objects. 
But  in  limiting  myself  to  this  sense  of  the  word,  I  mean  to  avail  myself  to 
the  full  extent  of  that  restricted  acceptation,  and  I  shall  not  refuse  the 
appellation  productive  to  labor  which  yields  no  material  product  as  its  direct 
result,  provided  that  an  increase  of  material  products  is  its  ultimate  conse- 
quence. Thus,  labor  expended  in  the  acquisition  of  manufacturing  skill,  I 
class  as  productive,  not  in  virtue  of  the  skill  itself,  but  of  the  manufactured 
products  created  by  the  skill,  and  to  the  creation  of  which  the  labor  of 
learning  the  trade  is  essentially  conducive.  The  labor  of  officers  of  govern- 
ment in  affording  the  protection  which,  afforded  in  some  manner  or  other, 
is  indispensable  to  the  prosperity  of  industry,  must  be  classed  as  productive 
even  of  material  wealth,  because  without  it.  material  wealth,  in  anything 
like  its  present  abundance,  could  not  exist.  Such  labor  may  be  said  to  be 
productive  indirectly  or  mediately,  in  opposition  to  the  labor  of  the  plough- 
man and  the  cotton  spinner,  which  are  productive  immediately.  They  are 

1  Principles  of  Political  Economy  (from  the  Fifth  London  Edition),  Bk.  I, 
Chapter  III,  p.  76.  New  York,  1909. 


PERSONAL  AND  PROFESSIONAL  SERVICE       259 

all  alike  in  this,  that  they  leave  the  community  richer  in  material  products 
than  they  found  it ;  they  increase  or  tend  to  increase  material  wealth. 

By  unproductive  labor  on  the  contrary,  will  be  understood  labor  which 
does  not  terminate  in  the  creation  of  material  wealth ;  which,  however 
largely  or  successfully  practised,  does  not  render  the  community  and  the 
world  at  large  richer  in  material  products,  but  poorer  by  all  that  is  consumed 
by  the  laborers  while  so  employed. 

All  labor  is,  in  the  language  of  political  economy,  unproductive,  which 
ends  in  immediate  enjoyment,  without  any  increase  of  the  accumulated 
stock  or  permanent  means  of  enjoyment.  And  all  labor,  according  to  our 
present  definition,  must  be  classed  as  unproductive,  which  terminates  in  a 
permanent  benefit,  however  important,  provided  that  an  increase  of  material 
products  forms  no  part  of  that  benefit.  The  labor  of  saving  a  friend's  life 
is  not  productive,  unless  the  friend  is  a  productive  laborer,  and  produces 
more  than  he  consumes.  To  a  religious  person  the  saving  of  a  soul  must 
appear  a  far  more  important  service  than  the  saving  of  a  life ;  but  he  will 
not  therefore  call  a  missionary  or  a  clergyman  productive  laborers,  unless 
they  teach,  as  the  South  Sea  Missionaries  have  in  some  cases  done,  the 
arts  of  civilization  in  addition  to  the  doctrines  of  their  religion.  It  is,  on 
the  contrary,  evident  that  the  greater  number  of  missionaries  or  clergymen 
a  nation  maintains,  the  less  it  has  to  expend  on  other  things ;  while  the 
more  it  expends  judiciously  in  keeping  agriculturists  and  manufacturers  at 
work,  the  more  it  will  have  for  every  other  purpose.  By  the  former,  it 
diminishes,  cceteris  paribus,  its  stock  of  material  products ;  by  the  latter 
it  increases  ccsteris. 

Both  these  eminent  writers  seem  to  look  upon  the  produc- 
tion of  vendible  commodities,  either  directly  or  indirectly,  as 
the  end  of  economic  activity.  From  that  point  of  view,  even 
cheap  and  tawdry  articles  which  are  of  no  use  to  anyone,  as  a 
puritanical  moralist  would  say,  are  nevertheless  wealth,  and  the 
labor  which  produces  them  is  productive  labor.  On  the  other 
hand,  the  philosopher  who  elevates  our  thoughts  above  the 
plane  where  such  things  are  enjoyed  would  be  an  unproductive 
laborer.  And  yet  this  philosopher  might  be  doing  infinitely 
more  for  the  ultimate  prosperity  and  greatness  of  the  nation 
than  the  manufacturer  of  such  articles. 

There  is,  however,  something  finely  democratic  in  the  attitude 
of  these  writers.  It  assumes  that  whatever  the  people  want,  as 


26o          PRINCIPLES  OF  POLITICAL  ECONOMY 

expressed  either  by  their  votes  or  by  their  purchases,  they  are 
entitled  to  have,  and  that  no  one,  not  even  the  philosopher, 
should  set  himself  up  as  a  moral  censor.  Their  judgment,  as 
expressed  through  their  purchases  of  vendible  commodities,  is 
the  final  word  in  such  matters.  Only  such  labor  as  supplies, 
either  directly  or  indirectly,  things  which  the  people  are  will- 
ing to  purchase  is  to  be  regarded  as  productive  according  to 
their  point  of  view. 

Distinction  similar  to  that  between  producers'  and  con- 
sumers' goods.  Another  and  more  satisfactory  way  of  looking 
at  this  distinction  between  productive  and  unproductive  labor 
is  to  compare  it  with  the  distinction  between  producers'  and 
consumers'  goods.  It  would  not  occur  to  anyone  that  a  writer 
was  disparaging  bread  if  he  were  to  say  that  it  is  a  consumers' 
good  and  not  a  producers'  good.  To  say  that  a  sewing  machine 
is  a  producers'  good,  while  a  coat  is  a  consumers'  good,  is  not 
necessarily  to  place  the  machine  in  a  superior  class  and  the 
coat  in  an  inferior  class.  And  yet  to  say  that  a  coat  is  a  con- 
sumers' good  may  mean  very  much  the  same  as  to  say  that  it 
is  an  unproductive  good.  In  the  above  passage  Mill  distinctly 
states  that  unproductive  labor  is  not  necessarily  useless  labor. 

Much  of  that  which  these  writers  include  under  unproductive 
labor  may,  however,  be  productive  even  in  the  technical  sense 
in  which  they  use  that  word.  A  menial  servant,  for  example, 
who  saves  the  time  of  his  employer  and  enables  him  to  devote 
his  energies  exclusively  to  highly  productive  work  really  con- 
tributes to  the  production  of  vendible  commodities,  even  though 
he  himself  has  no  direct  connection  with  any  such  article ;  but 
if  a  menial  servant  or  anyone  else  merely  helps  a  man  of  leisure 
to  while  away  his  idle  hours  by  furnishing  amusement  or  enter- 
tainment, his  work  can  scarcely  be  called  productive  in  any  sense. 

Wherein  labor  contributes  to  national  prosperity  and  wherein 
it  does  not.  After  all,  the  important  distinction  is  not  between 
the  labor  which  produces  vendible  commodities  and  that  which 
does  not.  The  distinction  of  real  importance  is  that  between 


PERSONAL  AND  PROFESSIONAL  SERVICE       261 

labor  which  contributes  to  the  well-being,  prosperity,  and  great- 
ness of  the  nation  and  that  which  does  not.  Labor  may  pro- 
duce a  commodity  which  sells  for  a  high  price  on  the  market,  — 
which  satisfies  an  intense  desire  which  people  will  pay  a  high 
price  to  have  gratified ;  and  yet,  if  the  desire  is  a  vicious  one, 
if  its  gratification  weakens  in  mind  or  body  those  who  buy  it, 
or  if  it  merely  incapacitates  them  temporarily  for  useful  work, 
that  labor  would  have  to  be  classed  as  unproductive.  On  the 
other  hand,  the  labor  of  the  musician,  the  poet,  or  the  preacher, 
if  it  does  not  tend  to  produce  softness,  but  inspires  to  strenu- 
osity  and  productivity,  if  it  rationalizes  the  consumption  of 
wealth,  if  it  makes  people  desire  the  right  things,  would  have 
to  be  classified  as  highly  productive.  To  be  sure,  a  book,  a 
poem,  or  a  picture  is  a  vendible  commodity,  and  its  producer 
would  be  called  a  productive  laborer  under  the  classic  definition. 
If  one  wanted  to  insist  upon  it,  one  might  go  so  far  as  to  say 
that  the  sound  waves  produced  by  the  musician  or  the  talker 
are  also  material  things  and  vendible,  but  it  is  not  necessary 
to  go  so  far  as  that. 

This  distinction  not  so  clear  as  the  other.  One  disad- 
vantage in  the  position  which  we  are  taking  in  favor  of 
the  view  that  the  important  distinction  is  that  between  labor 
which  adds  to  the  well-being  of  the  nation  and  labor  which 
does  not,  is  that  it  leaves  a  great  deal  to  the  opinion  of  the 
student.  Whether  labor  produces  a  vendible  commodity  or  not 
is  generally  a  question  of  ascertainable  fact.  Whether  it  is 
good  for  the  nation  or  not  is  sometimes  a  matter  of  opinion. 
There  could  scarcely  be  any  denial,  for  example,  that  a  distil- 
lery produced  a  vendible  commodity,  but  there  has  been  a  great 
deal  of  difference  of  opinion  as  to  whether  it  was  a  benefit  or 
an  injury  to  the  nation.  On  the  other  hand,  it  could  scarcely  be 
claimed  that  a  moral  leader  who  persuaded  people  to  become 
total  abstainers  was  producing  vendible  commodities,  but  there 
are  those  who  hold  to  the  opinion  that  he  is  contributing  to  the 
general  well-being  of  the  nation. 


262          PRINCIPLES  OF  POLITICAL  ECONOMY 

Granting  the  advantage,  from  the  standpoint  of  clearness,  of 
the  classical  distinction  between  productive  and  unproductive 
labor,  the  present  writer  nevertheless  contends  that  the  distinc- 
tion between  that  labor  which  is  beneficial  and  that  which  is 
not  is  much  more  important.  Probably  as  large  a  proportion 
of  the  labor  which  is  engaged  in  producing  material  commodi- 
ties for  the  market  is  wasted  as  of  the  labor  which  is  not  so 
engaged.  Probably  as  large  a  proportion  of  that  labor  which  is 
not  engaged  in  producing  material  commodities  is  advantageous 
to  the  nation  as  of  that  which  is  so  engaged.  The  prosperity 
and  well-being  of  the  nation  will  depend  upon  the  proportion 
of  the  people  who  are  doing  useful  work  rather  than  upon  the 
proportion  that  are  producing  material  commodities. 

All  labor  which  is  not  engaged  in  the  production  or  han- 
dling of  material  commodities  which  are  bought  and  sold  on  the 
market  is  grouped,  not  only  in  this  chapter  but  in  various  cen- 
sus reports  and  other  public  documents,  as  professional  and  per- 
sonal service.  Professional  service  is  limited  to  a  few  learned 
or  highly  skilled  occupations  such  as  law,  medicine,  theology, 
teaching,  governing,  acting,  etc.  Personal  service  includes  such 
a  multitude  of  occupations  as  would  fill  a  small  catalogue. 
Barbers,  bootblacks,  valets,  domestic  servants,  who  render  their 
service  directly  rather  than  indirectly  through  the  medium  of 
a  material  product,  may  be  said  to  render  personal  service.  If 
it  is  genuine  service,  whether  it  is  professional  or  personal,  it 
is  a  factor  in  the  prosperity,  power,  and  greatness  of  the  nation. 


PART  THREE 
EXCHANGE 

Which  has  to  do  with  the  buying  and  selling  of  commodities 


263 


CHAPTER  XXII 

VALUE 

Exchange  a  part  of  the  division  of  labor.  In  the  chapter 
on  the  Division  of  Labor  it  was  pointed  out  that  there  is  a 
great  advantage  to  be  gained  from  specialization.  When  the 
whole  industrial  society  is  so  organized  that  each  person  can 
do  that  for  which  he  is  best  fitted  by  nature,  training,  inclina- 
tion, and  location,  the  general  quality  of  the  work  is  better 
than  it  would  be  if  everyone  had  to  learn  a  great  many 
things.  It  was  also  pointed  out  that  the  division  of  labor  neces- 
sitates the  exchange  of  products  and  services.  In  the  economics 
of  the  private  family  the  subject  of  exchange  is  so  unimportant 
as  to  be  ignored  altogether.  Within  the  family  a  sort  of  primi- 
tive communism  exists,  so  that  even  though  there  may  be  a 
division  of  labor  among  the  members,  there  is  practically  no 
trading  or  bartering  among  them.  In  the  larger  industrial  society, 
however,  unless  it  is  organized  also  on  a  communistic  basis, 
there  is  a  great  deal  of  trading,  bartering,  and  exchanging. 
Therefore  exchange  has  come  to  be  one  of  the  most  important 
departments  of  the  subject  of  public  economics,  or  political 
economy.  Our  whole  system  of  trading,  transporting,  and  mer- 
chandising is  a  necessary  part  of  an  industrial  system  which  is 
characterized  by  the  division  and  specialization  of  labor. 

Valuation  a  part  of  exchange.  An  important  part  of  this  in- 
tricate system  of  exchanges  is  the  process  of  valuation,  or  the 
evaluating  of  goods  and  services.  It  would  be  difficult  to  do 
very  much  exchanging  without  beginning  to  think  in  terms  of 
value.  In  fact,  even  in  the  simplest  case  of  barter,  as  when  boys 
swap  marbles,  each  barterer  in  his  mind  compares  the  desira- 
bility of  the  objects  that  are  to  be  exchanged.  To  compare 

265 


266          PRINCIPLES  OF  POLITICAL  ECONOMY 

the  desirability  of  the  objects  is  to  think  in  terms  of  value. 
In  its  original  and  individual  sense  the  value  of  a  thing  was 
the  esteem  in  which  it  was  held  ;  in  a  somewhat  more  highly 
developed,  or  social,  sense  the  value  of  a  thing  was  the  esteem 
in  which  it  was  held  by  all  those  who  were  interested  in  it. 
When  men  in  considerable  numbers  were  evaluating  and  com- 
paring the  same  group  of  commodities,  a  market  was  said  to 
exist.  Where  a  market  existed  for  an  object,  its  value  was  the 
esteem  shown  for  it  on  the  market.  The  sign,  or  symptom, 
of  that  esteem  is  the  fact  that  men  were  making  sacrifices 
in  order  to  get  the  object ;  that  is,  they  were  either  labor- 
ing to  get  it  or  they  were  giving  up  other  desirable  things  in 
exchange  for  it. 

Value  in  exchange.  This  willingness  to  give  something  — 
either  labor  or  another  desirable  object  —  in  exchange  for  a 
thing  has  finally  come  to  be  regarded  by  most  writers  as  the 
value  of  the  thing,  instead  of  being,  as  originally,  merely  as 
the  sign,  or  symptom,  of  the  esteem  in  which  it  was  held.  A 
brief  but  satisfactory  definition  of  market  value,  or  of  value  as 
it  is  understood  on  the  market  and  in  commercial  circles,  is 
"  power  in  exchange."  Under  this  definition  the  value  of  an 
article  is  the  power  which  it  confers  upon  its  owner  to  com- 
mand other  desirable  things  in  peaceful  and  voluntary  exchange. 
There  has  come,  therefore,  a  change  in  the  popular  meaning 
of  the  word  value.  In  modern  usage  the  esteem  in  which 
the  object  is  held,  or  the  desire  which  is  felt  for  it,  is  that 
which  gives  it  value  instead  of  being  the  value  itself. 

When  value  is  defined  as  power  in  exchange,  it  must  not 
be  confused  with  a  mere  ratio  of  exchange.  A  thing  which 
confers  upon  its  owner  the  power  to  command  other  things  in 
peaceful  and  voluntary  exchange  has  power  or  influence  over 
the  minds  of  men  ;  it  influences  their  choice  and  gets  them 
to  do  things  which  they  would  not  otherwise  do.  Within  cer- 
tain limits,  it  exercises  control,  or  at  least  influence,  over 
motives.  Of  course,  when  things  exchange  against  one  another. 


VALUE  267 

it  must  always  happen  that  they  exchange  in  certain  ratios ; 
but  the  ratio  is  merely  incidental  and  is  not  the  essential 
characteristic  of  value. 

To  value  is  to  esteem.  The  purchasing  power,  or  value  in 
exchange,  of  an  object  is  not  always  proportional  to  the  esteem 
which  is  felt  for  it,  or  the  intensity  of  the  desire  for  it.  Among 
wanderers  on  a  desert  a  small  portion  of  water  would  be  ex- 
ceedingly precious ;  but  if  none  of  them  had  anything  to  give 
in  exchange  for  it,  it  would  not  have  much  purchasing  power. 
It  would  not  have  much  market  value ;  that  is,  its  owner  would 
not  realize  very  much  from  its  sale.  It  would,  however,  be  held 
in  the  very  highest  esteem  ;  it  would  be  intensely  desired ;  it 
would  have  great  power  over  human  motives  ;  men  would  go  to 
any  length  to  get  it ;  and  if  they  had  many  things  to  give  in 
exchange  for  it,  it  would  have  great  power  in  exchange.  The 
situation  of  some  thirsty  men  on  a  desert  with  nothing  to  give 
in  exchange  for  water  is,  however,  very  unusual.  In  the  ordinary 
market  place,  men  have  something  to  give  for  whatever  they 
desire  most.  The  thing  which  is  intensely  desired,  esteemed, 
or  appreciated  will,  under  such  circumstances,  always  command 
many  other  desirable  objects  in  peaceful  and  voluntary  exchange. 

Some  writers  have  attempted  to  remove  this  difficulty  by 
distinguishing  between  value  in  use  and  value  in  exchange. 
The  tendency  of  later  writers  is  to  do  away  with  this  distinction. 
Value  in  use  is  nothing  except  utility,  whereas  value  in  exchange 
is  simply  value.  There  is,  however,  a  very  close  connection 
between  utility  and  value.  Utility  is  the  power  to  satisfy  a  want 
or  gratify  a  desire,  but  value  is  the  power  to  command  other 
desirable  things  in  peaceful  and  voluntary  exchange.  Value 
depends  upon  utility,  since  nothing  could  have  value  unless 
it  had  the  power  to  satisfy  a  desire  of  some  kind.  In  other 
words,  nobody  would  give  anything  in  peaceful  and  voluntary 
exchange  for  the  article  in  question  unless  he  desired  it.  On 
the  other  hand,  however  intensely  he  might  desire  it,  if  he 
had  nothing  to  give  in  exchange  for  it,  and  everyone  else  were 


268          PRINCIPLES  OF  POLITICAL  ECONOMY 

in  the  same  condition,  it  would  not  have  much  power  in  ex- 
change. The  water  in  the  foregoing  illustration  would  have  great 
utility  but  no  great  value,  —  certainly  no  great  market  value. 

Censorious  criticisms  upon  market  value.  There  is,  how- 
ever, still  another  sense  in  which  both  value  and  utility  are 
sometimes  used.  One  who  has  strong  ideas  on  the  subject 
will  sometimes  assert  that  a  given  commodity  is  "  really  worth  " 
very  little,  even  though  everybody  seems  to  desire  it  and  to  be 
paying  a  high  price  for  it,  or  that  it  is  "  really  worth  "  a  great 
deal,  even  though  no  one  else  seems  to  esteem  it  or  to  be  will- 
ing to  pay  much  of  anything  for  it.  In  this  case  the  speaker  is 
assuming  the  function  of  a  moral  or  economic  censor  and  is 
passing  judgment  upon  the  desires  of  the  people.  His  judg- 
ment may  be  sound  and  that  of  the  multitude  unsound,  or  vice 
versa.  There  are,  however,  always  those  who  have  ideas  on 
the  subject  of  "  real  "  value  as  opposed  to  market  value,  and 
of  real  utility  as  opposed  to  the  popular  idea  of  utility.  Their 
idea  of  "  real "  utility  is  the  power  to  satisfy  a  commendable 
desire,  whereas  economic  writers  have  generally,  though  not 
universally,  defined  utility  as  the  power  to  satisfy  any  sort 
of  desire. 

Distinction  between  value  and  price.  Value  should  also  be 
distinguished  from  price.  The  price  of  an  article,  as  has  been 
explained  many  times  by  economists,  is  merely  its  value  ex- 
pressed in  terms  of  some  single  commodity  which  the  com- 
munity has  generally  agreed  upon  as  the  measure  of  value  and 
the  medium  of  exchange.  This  commodity  is  usually  money. 
Whenever  the  word  price  is  used,  if  it  is  used  properly,  it 
means  value  expressed  in  money,  or  the  amount  of  money 
which  will  exchange  for  a  given  article.  Wherever  the  word 
•value  is  used,  at  least  in  connection  with  the  general  condi- 
tions of  the  market,  it  means  its  general  power  in  exchange 
against  other  articles,  of  which  money  is  only  one.  The  cheapen- 
ing of  money  tends  to  create  a  general  rise  in  prices  but  not 
a  general  rise  in  price  values. 


VALUE  269 

To  summarize,  the  economic  value  of  an  object  is  variously 
denned  as 

1 .  Its  price,  that  is,  the  amount  of  money  for  which  it  sells ; 

2.  Its  utility,  which  may  mean 

a.  Its  power  to  satisfy  any  desire, 

b.  Its  power  to  satisfy  a  commendable  desire ; 

3.  Its  power  to  affect  the  well-being  of 

a.  An  individual, 

b.  Society,  or  the  nation  ; 

4.  Its  power  over  human  motives, 

a.  Causing  men  to  exert  themselves  in  order  to  get  it, 

b.  Causing  men  to  give  other  desirable  things   in  ex- 

change for  it,  because  of 

(1)  The  intensity  of  their  desire  for  it, 

(2)  The  abundance  of  other  desirable  things  in  their 

possession. 

Since  we  are  here  concerned  with  the  general  problem  of 
exchange  and  market  value,  the  last  of  these  four  definitions 
will  be  used  in  this  chapter.  If  we  may  accept  "  power  in 
exchange  "  as  a  good  working  definition  of  market  value,  or 
value  as  it  is  used  on  the  market  and  in  our  general  system 
of  exchange,  several  questions  will  at  once  arise.  One  of  these 
is,  Why  do  some  things  possess  this  power  and  others  not  ? 
Another  is,  Why  do  some  things  possess  more  of  it  than 
others  ?  Or,  again,  Why  does  the  same  thing  possess  more  of 
it  at  one  time  or  place  than  at  another? 

Value  attaches  to  concrete  things.  Not  much  headway  can 
be  made  in  answering  any  of  these  questions,  until  we  clear 
the  way  by  certain  necessary  explanations.  Some  of  these 
explanations  can  be  understood  only  after  some  very  hard  and 
clear  thinking.  In  the  first  place,  we  must  distinguish  between 
things  in  general  and  concrete  units.  It  is  one  thing  to  speak 
of  the  value  of  bread  in  general ;  it  is  another  thing  to  speak 
of  the  value  of  a  loaf  of  bread.  It  is  one  thing  to  speak  of 
the  value,  or  the  lack  of  value,  of  air  in  general,  and  another 


270          PRINCIPLES  OF  POLITICAL  ECONOMY 

thing  to  speak  of  the  value,  or  lack  of  value,  of  a  given  cubic 
yard  of  air.  If  one  will  look  around  and  see  what  is  going  on, 
one  will  notice  that  men  are  not  exchanging  things  in  general, 
but  only  concrete  units  or  quantities  of  things,  —  not  wheat  in 
general,  but  a  given  number  of  bushels  of  wheat  of  a  given 
grade ;  not  money  in  general,  but  a  given  number  of  dollars, 
francs,  or  pounds ;  and  even  if  air  or  water  were  exchanged, 
it  would  not  be  air  or  water  in  general,  but  some  cubic  yards 
or  gallons  in  definite  numbers. 

This  distinction  between  things  in  general  and  concrete 
units  or  quantities  will  eliminate  forever  the  confusion  that 
sometimes  results  when  that  distinction  is  not  made.  For 
example,  we  are  sometimes  told  that  air  is  of  immeasurable 
utility,  and  yet  it  has  no  power  in  exchange.  If  one  will 
think,  however,  not  of  air  in  general  but  of  a  definite  cubic 
yard  of  air  which  may  be  boxed  up  (it  might  even  be  offered 
for  sale),  and  then  if  one  will  ask  one's  self  how  much  utility 
to  him  is  possessed  by  that  particular  cubic  yard  of  air,  he  will 
find  that  it  is  of  no  use  to  him  whatever.  If  it  were  of  any  use 
to  him,  that  is,  if  'he  would  be  any  better  off  with  it  than  with- 
out it,  he  would  be  willing  to  give  something  in  exchange  for 
it ;  it  would  then  possess  value,  or  power  in  exchange. 

Total  utility  and  final,  or  marginal,  utility.  This  means,  in 
other  words,  that  there  are  two  distinct  ideas  of  utility  :  one  is 
total  utility  and  the  other  is  sometimes  called  specific,  some- 
times final,  and  sometimes  marginal  utility.  We  gain  an  impres- 
sion of  the  total  utility  of  air  when  we  think  what  would  happen 
to  us  if  all  the  air  in  existence  were  suddenly  annihilated,  or  if 
we  individually  were  shut  off  from  access  to  air.  From  this 
point  of  view  the  total  utility  of  air  is  incalculable.  But  if  we 
were  to  consider  what  would  happen  if  a  definite  cubic  yard 
were  annihilated  or  if  we  were  shut  off  from  access  to  it,  we 
get  a  very  different  impression.  As  a  matter  of  fact,  it  would 
make  no  difference  to  anybody,  because  there  would  be  enough 
left  to  satisfy  completely  every  desire  for  air. 


VALUE  271 

In  this  world  of  adjustment,  improvement,  and  progress,  or 
of  maladjustment  and  retrogression,  the  problem  of  having 
more  or  of  having  less  of  various  things  is  always  the  impor- 
tant problem.  How  desirable  is  it  that  there  should  be  more 
air  than  there  is,  or  how  undesirable  is  it  that  there  should  be 
less  air  than  there  is  ?  Apparently  this  is  a  matter  of  indiffer- 
ence. It  is  for  this  reason  that  in  a  practical,  workaday  world, 
where  we  are  trying  to  improve  our  condition  or  to  prevent 
it  from  becoming  worse,  our  interest  in  material  things  cen- 
ters in  the  question  as  to  how,  through  them,  we  can  increase 
our  well-being.  Can  we,  for  example,  by  increasing  the  quan- 
tity of  a  certain  commodity,  improve  our  condition,  or  can  we 
not  ?  If  we  can,  then  we  have  an  excellent  reason  for  trying 
to  increase  our  supply.  If  we  cannot,  there  is  no  such  reason. 
No  social  utility  would  be  promoted  by  increasing  the  supply 
of  air  or  by  offering  a  price  for  increasing  it.  There  is,  there- 
fore, no  social  or  individual  reason  why  it  should  possess  any 
value  or  any  power  in  exchange.  On  the  other  hand,  if  you 
think  of  an  article  of  which  you  can  say  that  you  would  be 
better  off  if  you  had  a  little  more  of  it,  or  worse  off  if  you  had 
a  little  less  than  you  have,  you  have  a  perfectly  good  individual 
reason  for  increasing  your  possession.  Or  if  the  community 
can  say  that  it  would  be  better  off  if  it  had  more  of  it,  or  worse 
off  if  it  had  less,  then  the  community  would  have  a  perfectly 
good  reason  for  desiring  to  increase  the  supply.  This  is  the 
case  with  everything  which  has  value.  If  the  community  thinks 
that  it  would  be  better  off  if  it  had  more  of  it  or  worse  off 
if  it  had  less,  the  article  in  question  will  have  value. 

A  moral  philosopher  might  conclude  otherwise ;  that  is, 
he  might  think  that  the  desires  of  the  people  were  vicious 
and  that  they  would  be  worse  off  if  they  had  more  of 
a  certain  article,  whereas  they  themselves  think  they  would 
be  better  off  if  they  had  more  of  it.  It  is  the  desires  of 
the  multitude  rather  than  the  conclusions  of  the  moral  philoso- 
pher which  determine  market  value.  This  may  be  called  a 


272          PRINCIPLES  OF  POLITICAL  ECONOMY 

functional  theory  of  value.  The  function  of  value  in  a  society 
is  to  induce  producers  to  produce.  It  is  a  symptom  that 
more  of  the  article  possessing  value  is  wanted.  It  is,  at  the 
same  time,  a  means  of  getting  more ;  that  is,  if  people  will 
offer  desirable  things  in  exchange  for  an  object,  someone  may 
be  induced  to  produce  it. 

The  first  law  of  the  market.  The  first  law  of  the  market 
is  that  things  of  the  same  kind  and  quality  tend  to  have  the 
same  value  at  the  same  time  and  place.  That  is  to  say,  at  any 
given  time  and  place,  if  there  are  a  large  number  of  units,  all 
exactly  alike  and  equally  desirable,  they  will  all  tend  to  sell  at 
the  same  price  and  have  the  same  power  in  exchange.  If  they 
are  unlike,  some  of  them  being  more  desirable  than  others,  of 
course  some  will  have  more  power  in  exchange  than  the  others. 
Again,  the  values  may,  on  a  feverish  market,  change  from 
minute  to  minute,  that  is,  so  rapidly  as  to  create  the  illusion 
of  selling  at  different  prices  at  the  same  time.  Or,  again,  in 
different  portions  of  the  same  market  similar  things  some- 
times sell  at  different  prices.  The  tendency,  however,  is  toward 
a  uniform  price  at  the  same  time  and  place.  Where  a  com- 
modity has  become  standardized  so  that  there  are  many  units 
that  are  equally  desirable,  it  has  become  customary  to  buy  the 
article  by  quantity,  without  taking  the  trouble  to  pick  out  the 
specific  units  desired.  Wheat,  coal,  cotton,  pig  iron,  and  many 
other  commodities  are  so  graded  and  standardized  as  to  sell  in 
this  way.  On  the  other  hand,  there  are  a  great  many  com- 
modities that  are  not  easily  standardized.  In  these  cases  the 
purchaser  will  usually  insist  on  picking  out  the  individual  units 
which  he  desires.  Race  horses,  dwelling  houses,  farms,  build- 
ing lots,  and  a  multitude  of  other  things  will  probably  always 
have  to  be  bought  and  sold  in  this  way. 

A  thing  has  value  only  when  someone  wants  it.  A  con- 
crete article  of  the  kind  just  described,  or  a  definite  quantity 
of  a  standardized  article,  will  have  power  in  exchange,  of 
course,  only  on  condition  that  somebody  happens  to  desire  it. 


VALUE  273 

No  one  will  give  any  desirable  thing  in  peaceful  and  voluntary 
exchange  for  something  which  he  does  not  desire  to  possess. 
Again,  the  quantity  of  value  which  a  thing  will  possess,  that 
is,  the  number  of  other  things  which  will  be  given  in  exchange 
for  it,  depends  on  how  much  it  is  desired  in  comparison  with 
those  other  things.  If  the  article  in  question  is  very  much 
wanted  and  a  number  of  other  things  are  not  much  wanted, 
then  a  considerable  quantity  of  these  other  things  will  be  given 
in  exchange  for  it. 

Two  reasons  why  a  thing  may  not  be  wanted.  The  next 
question  is,  Why  are  some  things  desired  and  others  not  ?  And 
why  are  some  desired  more  than  others  ?  There  are  two 
primary  reasons  why  an  article  may  not  be  desired  at  all.  In 
the  first  place,  it  may  possess  no  total  utility ;  that  is,  there 
may  be  no  use  to  which  it  can  be  put,  so  far  as  anyone  knows. 
There  are  not,  however,  very  many  such  things.  The  other 
reason  is  that  there  are  so  many  other  things  just  like  the  one 
in  question  as  to  more  than  satisfy  the  desire.  Where  water  is 
very  scarce  the  desire  for  it  becomes  intense ;  where  it  is  abun- 
dant, the  desire  is  completely  satiated,  so  that  if  a  specific  barrel 
or  gallon  of  water  were  offered  for  sale,  no  one  would  desire 
it  at  all.  In  such  a  situation  water  would  have  as  little  value 
as  though  there  were  no  possible  use  to  which  it  could 
be  put. 

One  might  go  even  farther  and  name  articles  which, 
though  capable  of  satisfying  desires  or  of  being  put  to  im- 
portant uses,  have  yet  become  worse  than  worthless,  —  that  is, 
have  become  nuisances  through  their  overabundance.  Many 
of  the  weeds  which  infest  our  fields  belong  in  this  class.  Water 
in  a  swampy  region  also  comes  to  possess  a  negative  value,  — 
that  is,  men  will  go  to  considerable  expense  to  get  rid  of  a  part 
of  it,  —  and  yet  it  may  be  perfectly  good  water,  capable  of 
contributing  not  only  to  human  life  but  to  plant  and  animal 
life  as  well.  Rabbits  in  Australia  and  English  sparrows  in 
America  will  serve  as  further  illustrations. 


274          PRINCIPLES  OF  POLITICAL  ECONOMY 

A  commodity  has  value  only  when  there  is  not  enough  of  it. 
We  therefore  reach  the  general  conclusion  that  an  article 
(that  is,  a  definite  object,  such  as  may  be  bought  and  sold)  has 
value  only  when  it  is  wanted,  and  that  it  is  wanted  only  when 
there  are  so  few  objects  like  it  as  to  leave  the  desire  for  it  par- 
tially unsatisfied.  If  there  are  so  many  others  like  it  that  the 
desire  is  completely  satiated,  the  object  in  question  will  not  be 
wanted  at  all ;  and  that  holds  true  of  each  and  every  one  con- 
sidered singly.  But  if  there  are  not  enough  to  go  round  and 
satisfy  everybody,  each  and  every  such  object  will  be  desired 
and  will  consequently  have  a  value. 

Following  the  same  line  of  reasoning,  we  may  reach  the 
further  conclusion  that  an  object  has  much  value  when  it  is 
much  desired,  that  is,  when  there  are  many  people  who  desire 
it  and  each  one  desires  it  intensely ;  it  has  little  value  when  it 
is  not  much  desired,  that  is,  when  there  are  few  people  who 
desire  it  or  when  they  who  happen  to  desire  it,  desire  it  with 
a  low  degree  -of  intensity.  Its  power  in  exchange  as  compared 
with  other  things  will  depend  on  how  intensely  it  is  desired  in 
comparison  with  other  things. 

Physiological  basis  of  the  law  of  demand  and  supply.  The 
great  law  of  supply  and  demand  is  thus  seen  to  have  a  physio- 
logical and  psychological  basis.  The  expression  "  supply  and 
demand  "  is  merely  a  formula  ;  back  of  this  formula  there  is  the 
physiological  fact  pointed  out  in  Chapter  II.  Every  desire  is 
satiable,  and  the  more  nearly  the  desire  approaches  the  state 
of  complete  satiation,  the  less  intense  it  becomes.  Thus  the 
reason  that  any  superabundant  article  under  ordinary  circum- 
stances has  no  value  is  because  it  is  so  abundant  that  every 
desire  is  completely  satiated.  That  is  the  reason  why  water  has 
little  or  no  value  in  a  well-watered  country.  Wherever  it  is  so 
scarce  that  the  desire  for  it  is  not  completely  satiated,  as  is  the 
case  in  an  arid  climate  where  people  are  trying  to  farm,  it  has 
a  value.  It  is  the  physiological  or  psychological  state  of  the 
desire  which  furnishes  the  real  basis  for  the  law  of  supply 


VALUE  275 

and  demand.  With  a  given  demand,  the  greater  the  supply  the 
more  nearly  all  desires  will  approach  the  point  of  satiation,  and 
the  more  indifferent  everyone's  attitude  toward  the  object 
becomes ;  on  the  other  hand,  the  smaller  the  supply,  the  more 
intense  the  desire  for  each  unit  of  that  supply,  and  the  more 
anxious  men  are  to  get  it. 

As  there  are  two  reasons  mentioned  above  why  an  object 
may  not  be  desired  at  all,  there  are  also  two  similar  reasons 
why  the  desire  for  it  may  be  one  of  little  intensity.  In  the  first 
place,  the  possible  uses  to  which  the  object  may  be  put  may  be 
of  very  little  consequence  to  anybody ;  it  may  gratify  a  mere 
whim  or  caprice.  In  the  second  place,  the  supply  may  be  so 
great  that  the  desire  is  almost  completely  satisfied,  and  in  this 
case  no  one  will  care  very  much  about  getting  more  than  he 
has,  nor  will  anyone  give  very  much  to  get  more.  Under  either 
set  of  circumstances  no  one  gains  very  much  in  the  way  of 
satisfaction  or  well-being  if  some  producer  adds  to  the  supply ; 
no  one  loses  very  much  if  some  destroyer  subtracts  from  the 
supply.  This  may  seem  very  simple,  but  it  is  one  of  the  most 
important  considerations  in  the  whole  field  of  economics  ;  for 
the  same  law  of  value,  as  we  shall  see  when  we  take  up  the 
study  of  distribution,  applies  to  the  labor  of  men  as  well  as 
to  material  commodities.  There  are  the  same  fundamental 
principles  underlying  the  law  of  supply  and  demand  in  one 
case  as  in  the  other. 

The  relation  of  utility  to  value.  When  we  say  that  an 
object  has  value  only  when  it  is  wanted,  we  are  virtually  saying 
that  it  has  value  only  when  it  has  utility,  for  utility  is  by  defini- 
tion the  power  to  satisfy  a  want  or  a  desire.  Whether  that 
want  be  physiological,  like  hunger,  or  whimsical,  like  the  desire 
for  the  latest  novelty,  does  not  affect  the  case  in  the  ordinary 
economic  sense.  Economists  have  generally  refrained  from 
passing  moral  judgment  on  the  quality  of  desires,  though  there 
is  a  tendency  to  depart  from  this  tradition.  If  the  gratification 
of  a  vicious  desire  does  harm  in  the  long  run,  it  tends  to 


276          PRINCIPLES  OF  POLITICAL  ECONOMY 

destroy  the  well-being  and  prosperity  of  the  community.  This 
is  a  consideration  of  great  economic  importance.  The  tend- 
ency, however,  in  a  democratic  society  has  been  to  assume  that, 
whatever  the  people  happen  to  like,  it  is  their  affair  and  not 
the  affair  of  the  economist  or  the  moral  philosopher.  If  there 
is  a  popular  demand  for  a  cheap  and  tawdry  article,  or  for 
demagogical  politics,  there  would  seem  to  be  equally  good  rea- 
sons in  either  case  for  saying  that  the  people  should  have  what 
they  like.  To  set  one's  self  up  as  a  moral  censor,  to  pass  judg- 
ment on  the  desires  of  the  people  either  in  commercial  or  in 
political  affairs,  has  generally  been  considered  undemocratic. 
Under  the  impulse  of  this  rather  extreme  ideal  of  democracy, 
utility  has  been  defined,  as  stated  above,  as  the  power  to  satisfy 
desires,  whether  the  desires  be  good,  bad,  or  indifferent.  Any 
object,  therefore,  which  possesses  utility,  or  the  power  to  satisfy 
a  desire,  possesses  one  of  the  essential  factors  in  value. 

Meaning  of  scarcity.  When  we  say  that  an  article  has  value 
only  when  the  desire  for  it  is  left  unsatisfied,  we  are  virtually 
saying  that  it  has  value  only  when  it  is  scarce.  Scarcity  is  by 
definition  insufficiency  to  satisfy  desires.  A  thing  may  be  rare 
without  being  scarce ;  that  is  to  say,  however  little  there  may 
be  of  a  certain  article,  if  that  little  is  more  than  sufficient  to 
satisfy  all  desires,  it  can  hardly  be  said  to  be  scarce ;  or  how- 
ever much  there  may  be  of  a  thing,  speaking  absolutely,  if  there 
is  not  enough  to  satisfy  all  desires,  it  is  said  to  be  scarce. 
Flies  in  the  winter  time  may  be  rare,  but  they  are  not  scarce 
in  the  technical  economic  sense,  since  even  then  there  are  more 
than  are  wanted.  Speaking  absolutely,  there  may  be  more 
grass  than  weeds  on  a  given  farm,  but  relatively  to  the  farmer's 
desires,  grass  may  be  scarce  while  weeds  are  superabundant. 
If  we  assume  that  the  article  in  question  is  appropriable,  or 
capable  of  being  possessed  and  enjoyed,  and  not,  like  the 
moon,  entirely  beyond  our  reach,  we  may  say  that  anything 
which  possesses  both  utility  and  scarcity  will  have  power  in 
exchange,  and  nothing  else  whatsoever  will  have  that  power. 


VALUE  277 

The  utility  of  an  article  is  the  basis  of  the  demand  for  it ; 
the  scarcity  of  the  article  is  the  measurable  limit  of  its  supply. 
Every  boy  knows  that  the  first  apple  which  he  eats  at  any  one 
time  tastes  better  than  the  second,  provided  they  are  alike,  and 
the  second  better  than  the  third,  and  so  on.  He  knows  also 
that,  however  capacious  his  appetite,  if  the  supply  of  apples 
holds  out,  he  will  ultimately  reach  a  point  when  he  doesn't 
care  for  any  more ;  in  other  words,  he  will  reach  the  point  of 
complete  satiation  so  far  as  apples  are  concerned.  When  this 
point  is  reached,  apples  have  lost  their  utility  for  him,  and  he 
becomes  indifferent  to  them.  He  may  still  be  willing  to  give 
something  in  exchange  for  them  in  anticipation  of  to-morrow's 
hunger,  but  if  he  has  a  supply  sufficient  to  satisfy  not  only 
present  but  future  desires,  then  he  becomes  absolutely  indiffer- 
ent and  gives  nothing  in  exchange  for  them. 

Social  value.  We  now  approach  a  secondary  phase  of  the 
law  of  value.  Even  though  his  own  desire  for  apples  may  be 
completely  satiated,  not  only  in  the  present  but  in  the  antici- 
pated future,  his  commercial  instinct  may  prompt  him  to  prize 
them,  not  because  he  himself  desires  to  consume  them,  but 
because  he  can  trade  them  to  someone  else  for  objects  which 
he  himself  desires.  At  this  stage  he  has  arrived  at  the  point 
where  he  begins  to  take  account  of  social  utility  as  well  as  of 
individual  utility.  If  he  perceives  that  there  is  in  society  around 
him  an  unsatisfied  desire  for  apples,  he  may  make  use  of  that 
unsatisfied  desire  to  acquire  desirable  things  in  exchange  for 
his  own  surplus  apples.  This  soul-compelling  power,  that  is, 
power  in  exchange,  which  commodities  possess  on  the  market, 
he  is  able  to  make  use  of  to  his  own  advantage.  Thus  we  see 
a  great  many  men  producing  articles  far  in  excess  of  their  own 
needs,  because  they  know  that  these  articles  are  exchangeable  for 
other  things  which  they  need.  We  see  a  considerable  body  of 
men  doing  nothing  except  to  trade  in  objects  of  general  social 
desire.  But  the  laws  which  govern  social  valuation  are  funda- 
mentally the  same  as  those  which  govern  individual  valuation. 


278          PRINCIPLES  OF  POLITICAL  ECONOMY 

There  must  be  somebody  in  the  community  round  about  who 
has  less  of  the  object  than  he  wants  ;  otherwise  neither  the 
producer  nor  the  trader  would  be  able  to  exchange  the  object 
for  other  desirable  things. 

Diminishing  utility.  The  satiability  of  the  desire  for  a  given 
commodity  leads  to  what  is  known  as  the  law  of  diminishing 
utility,  desire  and  utility  being  reverse  aspects  of  the  same 
thing.  The  desire  exists  in  the  human  being  and  is  that  which 
the  object  of  the  desire  is  capable  of  satisfying.  Utility  exists 
in  the  object  outside  the  human  being  and  is  that  which  is 
capable  of  satisfying  his  desire.  In  proportion  as  the  human 
being's  desire  is  capable  of  being  satisfied,  in  that  proportion 
A  does  the  utility  of 

the  object  which 
satisfies  that  desire 
diminish  as  its  quan- 
tity increases.  This 

p x_    diminishing    utility 

of  a  desirable  ob- 
ject is  sometimes  illustrated  by  means  of  a  diagram,  of  which 
the  above  will  serve  as  a  sample. 

Let  us  measure  the  quantity  of  a  certain  commodity  along 
the  line  OX,  and  the  intensity  of  the  desire  for  it  along  the  line 
OY.  When  the  quantity  is  represented,  for  example,  by  the 
line  OG,  each  unit  is  desired  with  an  intensity  represented  by 
the  line  OE ;  and  when  the  quantity  is  represented  by  the  line 
OH,  the  desire  is  so  well  satisfied  that  the  intensity  of  the 
desire  is  now  represented  by  the  line  OF.  If  the  quantity  were 
to  increase  until  it  was  represented  by  the  line  OD,  all  desires 
would  be  satiated  ;  that  is,  the  desire  for  any  particular  unit  of 
the  supply  would  have  no  intensity,  —  there  would  be  no  desire 
left.  And,  finally,  if  the  quantity  were  to  increase  still  farther, 
the  commodity  might  be  considered  as  a  nuisance,  and  men 
might  begin  to  desire  to  have  less  of  it  rather  than  more. 
The  curve  ABCD  becomes  the  utility  curve  according  to  the 


VALUE  279 

assumptions.  Just  what  shape  this  curve  would  take  in  any 
individual  case  would  be  hard  to  determine.  One  thing,  how- 
ever, is  certain,  —  and  this  is  the  really  essential  thing,  —  that, 
whatever  its  shape,  it  is  a  descending  curve.  Its  distance  from 
the  line  OX  diminishes  as  we  approach  the  point  D.  That  is 
as  certain  as  that  a  desire  is  satiable.  Therefore  we  are  safe 
in  using  a  descending  curve  to  illustrate  the  decline  in  the 
intensity  of  the  desire  for  a  commodity  as  the  quantity  of  the 
commodity  increases  in  proportion  to  the  number  of  people 
who  desire  it. 

The  total  utility  of  the  commodity  is  represented  by  the 
surface  bounded  by  the  lines  OX,  OY,  and  the  curve  ABCD. 

Y  A 


- 

r — 

1 


D  O    D 

Its  marginal  utility,  that  is,  the  effective  utility  of  any  single 
unit  of  the  supply,  is  represented  by  the  line  OE  or  BG  when 
the  quantity  is  OG,  and  by  the  line  OF  or  CH  when  the 
supply  is  OH. 

If  now  we  consider  two  commodities  whose  quantities  and 
utilities  were  represented  by  the  two  diagrams  above,  we  shall 
see  how  the  relative  intensity  of  the  desires  for  the  two 
commodities  will  affect  their  relative  values. 

Let  us  assume  that  the  curves  ABC  in  the  two  diagrams 
represent  the  diminishing  intensity  of  the  desire  for  potatoes 
and  oranges  respectively,  and  the  line  OD  in  each  diagram  the 
available  quantity  of  each  commodity.  The  quantity  of  potatoes 
being  so  much  larger  than  that  of  oranges,  the  desire  for  them 
is  much  more  nearly  satiated  than  is  the  desire  for  oranges, 
though  the  total  utility  of  potatoes  is  much  greater ;  that  is  to 


280          PRINCIPLES  OF  POLITICAL  ECONOMY 

say,  a  pound  of  potatoes  out  of  the  total  supply  is  very  slightly 
esteemed  or  desired,  whereas  an  equal  quantity  of  oranges  out 
of  the  much  smaller  supply  is  more  highly  esteemed  or  desired. 
Under  these  circumstances  a  pound  of  oranges  would  have  as 
much  power  in  exchange  as  several  pounds  of  potatoes  ;  that 
is,  oranges  are  more  valuable  than  potatoes. 

By  increasing  the  number  of  diagrams,  the  relative  power 
in  exchange  of  a  number  of  commodities  could  be  illustrated 
in  the  same  way.  That,  however,  would  introduce  no  new 
principle,  but  would  only  complicate  matters. 


CHAPTER  XXIII 

SCARCITY 

Causes  of  scarcity.  It  was  shown  in  the  last  chapter  that 
commodities  must  be  both  desirable  and  scarce  in  order  to 
possess  value.  We  have  now  to  inquire  why  such  things  are 
scarce.  There  are  four  reasons  which  come  within  the  limits 
of  our  comprehension.  These  we  may  call  (i)  "the  niggard- 
liness of  nature,"  (2)  the  expansion  of  desires,  (3)  the  cost  of 
production,  and  (4)  monopoly. 

"  Niggardliness  of  nature."  When  the  term  "-niggardliness 
of  nature  "  is  used,  it  is  not  intended  to  cast  reflections  upon 
nature,  nor  to  imply  that  she  is  not  bounteous  in  many  respects. 
It  is  merely  to  call  attention  to  a  fact  which  cannot  well  be  dis- 
puted ;  namely,  that  in  many  places  men  have  congregated  in 
numbers  greater  than  nature  has  there  made  provision  for.  De- 
sirable things  are  scarce  in  those  places  at  least,  and  it  is  at 
least  necessary  to  bring  supplies  from  other  places  where  there 
is  a  surplus.  Moreover,  there  are  many  things  which  we  desire 
which  nature  does  not  supply  at  all  in  the  form  in  which  we 
desire  them,  though  she  supplies  the  raw  materials  out  of  which 
we  may  make  them.  Again,  some  things  which  we  desire  can 
only  be  produced  at  certain  times  and  seasons.  They  must 
therefore  be  preserved  and  kept  for  other  times  when  they 
will  be  needed. 

Expansion  of  desires.  The  fact  that  nature  does  not  supply 
us  with  everything  we  desire  in  the  exact  forms  and  at  the 
exact  times  and  places  when  and  where  we  happen  to  desire 
them  may  be  in  part  due  to  the  fact  that  we  desire  more  re- 
fined products  than  grow  in  a  natural  state,  or  to  the  fact  that 
great  numbers  of  us  choose  to  live  in  places  where  such 

281 


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282 


SCARCITY  283 

products  do  not  grow  in  sufficient  abundance.  It  is  only  a 
symptom  of  the  maladjustment  between  man  and  nature.  It  is 
not  necessarily  the  fault  of  either  man  or  nature  ;  it  is  simply 
a  fact  of  experience,  and  we  must  make  the  best  of  it.  There 
is,  however,  a  marked  tendency  for  human  desires  to  expand. 
"  When  goods  increase,  they  are  increased  that  eat  them." 
In  the  language  of  the  day,  "The  richer  we  get,  the  more  we 
want."  Therefore  we  must  expect  an  indefinite  continuation  of 
the  condition  wherein  some  desirable  things  are  insufficient  in 
quantity  to  satisfy  everybody.  We  shall  therefore  continue  try- 
ing to  increase  the  supply  of  desirable  things  in  the  forms  in 
which  they  are  wanted,  and  at  the  times  when  and  the  places 
where  they  are  wanted.  This  is  called  the  production  of  utili- 
ties, or,  more  properly,  the  adding  of  utilities  to  material  things, 
—  form  utility,  time  utility,  and  place  utility. 

Cost.  If  the  efforts  which  we  have  to  make  in  order  to  pro- 
duce utilities  were  altogether  pleasant  and  not  in  the  least 
degree  unpleasant  or  disagreeable,  there  is  no  reason  why  most 
things  might  not  be  produced  in  such  abundance  as  to  satisfy 
everybody  completely.  Some  things,  of  course,  cannot  be  in- 
creased by  any  human  effort.  Meteoric  iron  has  long  served  as 
an  illustration.  Autographs  of  distinguished  men  of  the  past, 
the  paintings  of  old  masters,  first  editions  of  books,  and  a 
number  of  other  illustrations  might  be  given.  But  if  we  are 
speaking  of  an  ordinary  reproducible  commodity,  we  are  safe 
in  saying  that  unless  there  were  some  difficulty  in  the  way  of 
indefinite  reproduction,  —  some  unpleasantness,  irksomeness, 
or  fatigue  connected  with  its  production,  —  its  supply  would 
certainly  increase  until  everyone  had  all  he  wanted  of  it. 

Effort  not  always  irksome.  Illustrations  are  not  hard  to  find 
of  desirable  commodities  which  have  to  be  secured  by  human 
effort,  but  which,  because  the  effort  is  pleasant  rather  than  un- 
pleasant, become  so  abundant  as  to  command  no  price.  Trout 
are  generally  regarded  as  a  delicacy  and  are  greatly  desired. 
They  can  only  be  caught  by  considerable  muscular  effort  and 


284          PRINCIPLES  OF  POLITICAL  ECONOMY 

by  the  exercise  of  great  patience  and  skill.  And  yet,  in  certain 
communities  where  the  demand  is  not  very  great  and  the  fish- 
ing not  too  arduous,  trout  are  caught  for  sport  in  such  numbers 
as  to  supply  the  neighborhood.  They  become  free  goods  and 
are  given  to  those  who  desire  them  without  money  and  without 
price.  If  there  were  more  consumers,  or  fewer  persons  who 
enjoyed  the  sport  of  fishing,  there  would  not  be  enough  to  go 
around.  Those  who  did  not  get  as  many  as  they  desired  would 
then  be  willing  to  pay  a  price  in  order  to  get  more.  In  other 
neighborhoods,  flowers  are  grown  for  pleasure.  The  demand 
not  being  very  great,  and  there  being  a  number  of  people  who 
enjoy  gardening,  there  is  such  an  abundance  that  everyone  is 
supplied  free  of  charge.  Poultry  raising  is  a  pleasure  to  many 
people  if  they  do  not  have  to  work  too  hard  at  it.  In  most 
neighborhoods,  however,  there  is  a  demand  for  eggs  and  poultry 
that  cannot  be  completely  satisfied  with  the  products  of  those 
who  keep  poultry  for  the  pleasure  of  it.  In  order  to  induce 
these  to  produce  more  than  is  pleasurable,  and  to  induce 
others  to  do  the  work  who  do  not  enjoy  it  at  all,  a  price 
must  be  paid.  The  price  is  paid,  virtually,  to  overcome  the 
disinclination  of  producers. 

Cost  is  disinclination.  All  the  reproducible  products  which 
sell  on  the  market,  and  which  are  not  monopolized,  are  limited 
in  supply  by  some  form  of  disinclination  or  reluctance  to  carry 
on  the  work  of  production.  This  disinclination  may  resemble 
that  which  one  finds  in  the  average  fisherman,  gardener,  or 
poultry  keeper,  to  whom  the  work  in  small  doses  is  not 
irksome,  or  it  may  be  of  a  different  sort  altogether.  In  the 
case  of  the  fisherman,  the  gardener,  and  the  poultry  keeper, 
their  work  may  be  pleasant  rather  than  unpleasant  up  to  a  cer- 
tain point.  Almost  anyone  likes  a  certain  amount  of  this  kind 
of  work,  though  some  of  us  are  easily  satisfied.  Beyond  that 
point  such  work  becomes  irksome  and  fatiguing,  and  we  keep 
at  it  only  on  condition  that  someone  pays  us  for  it.  Up  to  that 
point  it  was  play ;  beyond  that  point  it  literally  becomes  work. 


SCARCITY  285 

Opportunity  cost.  Where  two  kinds  of  work  are  pleasurable 
and  one  has  to  choose  between  them,  the  fact  that  one  has  to 
surrender  the  one  form  of  pleasure  in  order  to  pursue  the 
other  introduces  an  element  of  cost.  It  is  reported  of  a  certain 
man  that  he  was  passionately  fond  of  gardening,  but  could 
never  stick  to  it  because  as  soon  as  he  began  to  dig  he  found 
worms,  and  they  reminded  him  of  fishing,  of  which  he  was  even 
fonder  than  of  gardening. 

In  other  cases  the  work  is  disagreeable  from  the  very  start. 
There  is  no  element  of  play  in  it.  No  one  will  do  any  of  it 
unless  he  is  paid  for  it.  In  still  other  cases  the  work  itself 
would  be  pleasurable  rather  than  disagreeable  up  to  a  certain 
point,  if  it  were  not  for  the  fact  that  there  is  something  else 
that  one  would  rather  be  doing.  A  boy  might  not  ordinarily 
mind  working  in  the  garden,  but  when  there  is  a  circus  in  town 
or  a  ball  game  going  on,  gardening  suffers  in  his  estimation  by 
comparison  with  these  other  opportunities.  Whenever  we  have 
to  work  long  hours,  there  are  pretty  certain  to  be  many  other 
and  more  pleasurable  things  which  we  would  rather  do.  Having 
to  give  up  these  other  opportunities  would  make  our  work 
irksome  even  if  it  were  not  so  of  itself. 

The  resistance  which  has  to  be  overcome  in  order  to  get 
men  to  work.  Cost,  or  cost  of  production,  is  the  general  name 
which  we  apply  to  the  resistance  which  has  to  be  overcome  in 
order  to  get  a  thing  produced.  The  real  resistance  is  the 
resistance  of  the  human  will,  as  shown  by  the  fact  that  even 
though  physical  effort  has  to  be  put  forth,  so  long  as  the  effort 
is  pleasurable  it  does  not  have  to  be  paid  fo^  As  soon  as  it 
becomes  irksome  it  has  to  be  paid  for.  It  is  a  matter  of  choice, 
and  the  price  paid  is  a  means  of  influencing  choice.  The  irk- 
someness  of  the  effort  causes  men  to  choose  against  putting 
forth  the  effort ;  the  price  paid  for  the  article  causes  them  to 
choose  in  favor  of  it.  Such  words  as  irksome,  unpleasant,  or 
disagreeable  describe  certain  efforts  as  they  appeal  to  the 
mind.  The  words  disinclination  and  reluctance  describe  the 


286          PRINCIPLES  OF  POLITICAL  ECONOMY 

attitude  of  the  mind  toward  the  efforts  which  men  would  not 
be  willing  to  make  unless  they  were  rewarded  for  it. 

Distinction  between  play  and  work.  The  difference  between 
play  and  work  is  found  just  here.  Play  is  effort  of  both  mind 
and  body  which  is  put  forth  for  the  sheer  pleasure  of  the  effort 
itself.  Work  is  effort  which  is  put  forth  for  the  sake  of  a  re- 
ward which  is  detachable  from  the  effort  or  the  action.  Under 
very  favorable  circumstances  all  necessary  effort  might  con- 
ceivably take  the  form  of  play,  and  in  that  case  there  would  be 
no  such  thing  as  cost  of  production.  A  community  made  up  of 
people  with  very  simple  habits  and  very  strenuous  natures,  and 
in  a  very  favorable  environment,  might  possibly  reach  such  a 
delectable  state.  Having  very  simple  habits,  the  inhabitants  of 
this  community  would  be  able  to  get  the  greater  part  of  their 
higher  satisfactions  out  of  those  things  whereof  nature  is  boun- 
teous, such  as  the  sky,  the  clouds,  the  verdure,  and  pleasant 
company.  Living  in  a  very  favorable  environment,  they  could 
produce  such  things  as  had  to  be  produced  with  little  effort. 
Having  very  strenuous  natures,  abounding  in  energy  and  de- 
lighting in  effort,  they  could  do  the  necessary  work  of  produc- 
tion without  any  disinclination  or  reluctance.  This,  however, 
would  be  a  kind  of  earthly  paradise  which  we  may  dream  about 
but  are  not  likely  to  realize. 

Kinds  of  cost.  When  we  say  that  the  price  of  an  article 
has  to  be  high  enough  to  cover  the  cost  of  production,  we  really 
mean  that  it  has  to  be  high  enough  to  overcome  the  disin- 
clination of  men  to  do  whatever  is  necessary  in  order  to  pro- 
duce it.  This  disinclination  or  cost  is  of  various  kinds  and 
degrees.  Mention  has  been  made  of  those  operations  which 
are  inherently  disagreeable  from  the  very  start.  This  may  be 
called  disutility  or  pain  cost.  In  other  cases  there  is  no  dis- 
inclination until  the  work  has  been  carried  so  far  as  to  produce 
a  sense  of  fatigue.  This  may  be  called  fatigue  cost.  Again, 
the  disinclination  may  be  due  to  the  fact  that  the  work  in 
question  prevents  us  from  doing  something  else  which  we 


SCARCITY  287 

would  rather  be  doing.  This  is  called  opportunity  cost.  Oppor- 
tunity cost  arises  whenever,  in  order  to  do  a  certain  thing, 
one  must  give  up  the  doing  of  something  else  which  would 
be  advantageous  or  pleasurable  to  one's  self.  The  advantage 
which  one  gives  up  may  be  of  two  kinds  :  The  thing  which 
one  gives  up  may  be  pleasurable  in  itself  (that  is,  it  may 
be  play  or  amusement)  or  it  may  consist  in  the  opportunity  to 
earn  money  at  some  other  job.  In  either  case  one  must  be 
paid  for  doing  the  thing  in  question,  even  though  it  is  neither 
painful  nor  fatiguing ;  otherwise  one  will  avail  one's  self  of 
another  advantageous  opportunity. 

Pain  cost.  Of  these  three  forms  of  cost,  pain  cost  is,  in 
our  day,  the  least  important.  In  a  rude  state  of  society,  when 
conditions  were  hard  and  enemies  numerous,  it  may  have  been 
different.  Nowadays,  outside  of  a  few  dirty,  dangerous,  or 
otherwise  disagreeable  occupations,  there  is  comparatively  little 
work  which  is  disagreeable  in  itself.  When  hours  are  long, 
much  of  it  is  likely  to  be  fatiguing  and  irksome  for  that  reason. 
But  as  prosperity  and  well-being  increase,  and  general  social 
conditions  improve,  opportunity  cost  comes  to  play  a  more 
and  more  important  part.  Even  the  possession  of  high  wages 
or  a  large  income  creates  opportunities  for  amusement  or 
pleasure  which  otherwise  would  not  exist.  One  then  finds 
long  hours  more  irksome  than  they  would  otherwise  be,  not 
because  they  are  more  fatiguing,  but  because  they  deprive  one 
of  those  opportunities  for  pleasure  which  one's  larger  income 
enables  one  to  enjoy.  A  well-educated  man  has  more  oppor- 
tunities for  the  pleasurable  exercise  of  his  faculties  than  an 
uneducated  man  ;  therefore  he  needs  more  time  in  which  to 
do  these  pleasurable  things.  If  his  services  are  desired,  he 
must  generally  be  paid  more  in  order  to  induce  him  to  give 
up  these  other  opportunities.  Far  more  important  than  that, 
however,  is  the  fact  that  a  well-trained  man  has  many  more 
opportunities  to  earn  money  than  an  untrained  man.  Among 
these  opportunities  he  will  choose  only  the  one  which  he  likes 


288          PRINCIPLES  OF  POLITICAL  ECONOMY 

best.  Whoever  desires  his  services  or  his  products  must  there- 
fore bid  against  all  other  opportunities  which  lie  before  the 
trained  man.  Work  is  not  more  painful  or  more  fatiguing  to 
the  trained  man  than  to  the  untrained  man,  but  his  labor 
costs  more  because  of  the  opportunities  which  he  gives  up 
when  he  decides  to  do  a  certain  kind  of  work. 

Increasing  cost.  As  population  increases  or  concentrates  in 
certain  areas  the  natural  resources  of  those  areas  must  either 
be  worked  more  intensively  or  else  the  means  of  subsistence 
as  well  as  the  raw  materials  of  industry  must  be  brought  from 
greater  distances.  To  bring  them  from  greater  distances  obvi- 
ously requires  greater  effort,  unless  new  and  improved  methods 
of  transportation  are  invented.  Even  with  the  best  methods 
attainable  it  costs  more  to  haul  longer  than  to  haul  shorter 
distances.  To  work  mines  harder  tends  to  exhaust  them  more 
rapidly.  It  is  also  possible  to  work  land  so  intensively  as  to 
exhaust  the  soil  unless  great  care  is  taken  to  put  back  in  the 
soil  as  much  plant  food  as  is  used  up  by  the  crops  which  are 
taken  off.  To  exhaust  either  the  mines  or  the  soil  will  obvi- 
ously make  greater  and  greater  efforts  necessary  if  a  large 
population  is  to  be  provided  for  on  the  same  scale  as  before 
the  exhaustion  took  place.  Poorer  mines  must  be  worked,  and 
crops  must  be  grown  on  poorer  soil  where  more  effort  is 
required  to  get  the  same  crop. 

Diminishing  returns  and  increasing  cost.  Entirely  apart 
from  the  exhaustion  of  the  soil,  however,  is  the  great  law  of 
diminishing  returns  from  land.  This  law,  which  is  one  phase 
of  the  universal  law  of  variable  proportions,  will  be  discussed 
in  detail  in  a  chapter  devoted  to  that  subject  (see  Chapter  XXX). 
For  our  present  purpose  it  is  only  necessary  to  state  and 
define  the  law. 

It  is  a  well-known  fact  that  land  yields  more  per  acre  under 
intensive  than  under  extensive  cultivation.  By  intensive  cul- 
tivation is  meant  the  application  of  considerable  quantities 
of  labor  and  capital  to  each  unit  of  land ;  by  extensive 


SCARCITY  289 

cultivation  is  meant  the  application  of  smaller  quantities  of  labor 
and  capital.  While  land  can  be  made  to  yield  more  when  large 
than  when  small  quantities  of  labor  and  capital  are  used  in  its 
cultivation,  still  there  are  limits  to  this  rule.  In  the  cultiva- 
tion of  any  particular  crop  there  comes  a  point  beyond  which 
it  does  not  seem  possible,  by  any  amount  of  labor,  care,  or 
cultivation,  to  increase  the  yield  appreciably.  Long  before  this 
point  is  reached,  however,  there  is  a  tendency  for  the  land  to 
yield  less  in  proportion  to  the  labor  and  capital  employed,  even 
though  it  continues  to  yield  slightly  more  per  acre  with  each 
increased  application  of  labor  and  capital  to  its  cultivation. 

As  a  result  of  this  law  more  effort  is  required  to  get  from 
the  soil  of  a  given  area  subsistence  for  a  large  than  for  a  small 
population.  Rather  than  incur  the  increasing  cost  of  produc- 
tion which  would  be  necessary  if  an  increasing  population 
should  attempt  to  get  its  subsistence  from  the  same  soil,  men 
have  uniformly  chosen  to  spread  their  cultivation  over  wider 
areas,  thereby  incurring  increased  cost  in  transportation,  or 
they  have  resorted  to  inferior  soils  within  the  boundaries  of 
the  original  area,  or  they  have  done  both.  There  is  no  good 
reason  in  the  world  why  they  should  ever  have  done  either  of 
these  things  except  that  which  is  furnished  by  the  law  of 
diminishing  returns.  If  they  could  have  doubled,  trebled, 
and  quadrupled  the  production  on  the  original  area  of  good 
soil  by  merely  doubling,  trebling,  and  quadrupling  the  labor  and 
capital  used  in  its  cultivation,  there  would  never  have  been  any 
reason  for  extending  their  cultivation.  But  when  they  found 
that  by  doubling  the  labor  and  capital  they  did  not  double  the 
yield,  even  though  the  yield  did  increase  somewhat,  then  they 
had  an  excellent  reason  for  extending  the  area  of  cultivation. 

We  have  therefore  several  reasons  why  increasing  effort  is 
necessary  to  get  increasing  supplies  for  an  increasing  popu- 
lation. The  law  of  diminishing  returns  is  one  ;  the  tendency 
toward  the  exhaustion  of  the  soil,  mines,  and  other  natural  re- 
sources is  another ;  the  necessity  of  cultivating  inferior  soils 


290          PRINCIPLES  OF  POLITICAL  ECONOMY 

is  another  ;  and  that  of  transporting  materials  greater  distances 
is  still  another.  All  of  these,  however,  are  closely  joined  to- 
gether, and  they  mutually  determine  one  another.  Add  to  these 
the  fact  that  increasing  effort  becomes  increasingly  irksome 
because  of  increasing  fatigue  and  increasing  opportunity  cost, 
and  we  have  what  may  be  known  as  the  law  of  increasing  cost. 
This  law  of  increasing  cost,  in  turn,  is  the  chief  factor  in 
limiting  production  and  keeping  the  supply  of  various  com- 
modities so  scarce  as  to  give  them  a  value. 

Monopoly.  Among  the  factors  which  tend  to  make  commodi- 
ties scarce  nowadays,  one  of  the  most  important  is  monopoly. 
A  monopoly  is  an  agency  which  has  sufficient  control  over  the 
supply  of  a  given  commodity  to  fix  its  price.  Without  this 
control  over  the  supply  neither  principalities  nor  powers  nor 
trusts  can  control  prices.  Without  this  control  over  supply, 
any  attempt  to  fix  prices  above  that  level  which  would  pay  the 
cost  of  production  would  merely  tempt  other  producers  to 
enter  the  field  and  take  the  market  away  from  the  would-be 
monopoly.  A  high  price  would  stimulate  the  outside  and 
independent  producers  to  increase  their  output.  Until  the 
would-be  monopoly  is  in  a  position  to  prevent  anything  of  this 
kind,  it  has  not  won  the  unenviable  privilege  of  being  called  a 
genuine  monopoly.^  Any  agency  which  has  succeeded  in  getting 
control  of  the  supply  of  a  commodity  has  become  a  monopoly, 
or  at  least  a  partial  monopoly,  whether  it  likes  to  be  called  by 
that  name  or  not.  Aside  from  the  government,  probably  no 
such  thing  as  an  absolute  monopoly  exists.  A  partial  monopoly 
exists  whenever  an  organization  exercises  sufficient  control  over 
the  supply  of  anything  to  enable  it  to  fix  its  prices,  even  within 
a  narrow  zone,  independently  of  competition.  This  means  that 
the  power  of  a  partial  monopoly  over  prices  is  not  absolute. 
It  may  fix  the  price  somewhat  higher,  but  not  much  higher, 
than  competition  would  fix  it.  Where  a  monopoly  is  not  abso- 
lute, if  it  attempts  to  fix  prices  outside  these  limits  it  will  create 
competition  and  destroy  its  power  to  control. 


SCARCITY  291 

This  control  may  be  exercised  in  two  ways :  first,  the 
monopoly  may  decide  upon  the  quantity  to  be  produced,  and 
then  sell  that  quantity  for  whatever  it  will  bring  on  the  market, 
allowing  the  law  of  demand  and  supply  to  fix  the  price ; 
second,  the  monopoly  may  decide  upon  the  price  at  which 
it  will  sell  the  product,  and  then  produce  only  as  much 
as  can  be  sold  at  that  price.  This  is  the  method  usually  fol- 
lowed. In  either  case  the  supply  is  limited  by  the  will  of  the 
monopoly  and  not  by  the  cost  of  production.  In  a  genuinely 
competitive  industry  the  supply  is  limited  by  the  cost  of  pro- 
duction. Producers  will  stop  production  rather  than  sell  for 
any  considerable  time  below  the  cost  of  production. 


MONEY 

Money  a  labor-saving  invention.  One  of  the  greatest  of  all 
labor-saving  devices  is  money.  If  one  will  try  to  imagine  the 
difficulties  of  carrying  on  exchange  without  the  use  of  money, 
that  is,  by  means  of  direct  barter,  one  will  easily  understand 
how  great  a  convenience  money  is.  Of  course,  without  the 
use  of  some  kind  of  money  we  never  could  have  developed 
our  present  highly  specialized  industrial  system,  under  which 
each  individual  does  that  for  which  he  is  best  fitted  and 
exchanges  his  products  or  services  for  the  products  and  services 
of  other  people  who  are  likewise  doing  that  for  which  they  are 
best  fitted.  But  even  if  we  could  imagine  such  an  industrial 
system  based  on  barter,  the  difficulties  would  seem  almost 
insuperable.  The  tailor  who  had  made  a  coat  and  desired 
bread  in  exchange  might  find  difficulty  in  finding  a  baker  who 
happened  to  want  a  coat ;  even  if  he  found  such  a  baker,  it 
would  be  difficult  for  the  tailor  to  carry  home  as  much  bread 
as  the  coat  would  be  worth.  By  some  kind  of  credit  system, 
of  course,  the  baker  could  credit  him  with  a  large  number  of 
loaves  of  bread,  to  be  called  for  one  at  a  time.  The  dairyman 
who  had  milk  to  sell  would  find  it  difficult  to  know  how  to 
collect  payment  for  the  very  small  quantities  which  he  delivered 
to  the  butcher,  the  baker,  the  tailor,  etc.  These  difficulties 
would  be  so  great  that  in  all  probability  there  would  be  com- 
paratively little  exchange.  The  farmer  would  have  to  be  his 
own  butcher,  tailor,  and  shoemaker.  Each  household,  in  fact, 
would  have  to  be  almost  self-sufficing. 

So  important  is  the  function  of  money  in  modern  industrial 
society  that  some  writers  have  seen  fit  to  divide  systems  of 

292 


MONEY  293 

economy  into  two  fundamental  types,  known  as  the  barter 
economy  and  the  money  economy.  Certain  savage  tribes,  who 
live  in  a  state  of  primitive  communism,  get  along  without  much 
exchanging.  Their  limited  commerce  with  the  other  tribes 
is  carried  on  by  means  of  barter  ;  furs  and  other  articles  of 
their  own  production  are  exchanged  for  outside  products  which 
they  desire.  The  introduction  of  money  makes  possible  a  great 
deal  of  exchanging  within  the  tribe  and  is  supposed  to  have 
marked  one  of  the  epochs  in  the  economic  development  of 
civilized  peoples. 

Various  substances  which  have  served  as  money.  Various 
commodities  or  articles  have  served  the  purpose  of  money. 
The  early  colonists  in  America  found  the  Indians  using  a 
kind  of  currency  known  as  wampum  or  bead  currency.  The 
Hudson  Bay  Company  and  other  companies  that  traded  with 
the  Indians  of  the  interior  developed  a  skin  or  fur  currency, 
in  which  the  skins  of  various  animals  were  recognized  as  stan- 
dards of  value  and  exchanged  at  the  ratios  agreed  upon.  In 
ancient  times  various  European  peoples  accordingly  used  cattle 
as  currency.  In  the  Homeric  poems  values  are  frequently 
quoted  in  terms  of  cattle.  A  very  amusing  and  at  the  same 
time  instructive  illustration  is  given  in  a  paper  entitled  "  Rudi- 
mentary Society  among  Boys,"  by  John  Johnson  in  the  Johns 
Hopkins  University  Studies  in  History  and  Political  Science, 
2d  Series,  No.  n.  In  this  primitive  boy  society,  butter  was 
used  as  money. 

BUTTER  AND  PIE  IN  BOYS'  SOCIETY 

Commonly  the  primary  object  of  the  hunters  is  to  obtain  a  handsome 
collection  of  curiosities,  and  to  enjoy  the  satisfaction  of  possession  along 
with  the  esteem  inspired  by  success  ;  but  occasionally  a  boy  hunts  with  a 
purely  commercial  end  in  view.  I  have  been  told  of  one  who  made  a  prac- 
tice of  exchanging  all  the  eggs  he  found  for  the  allowance  of  butter  given 
to  his  companions  at  meals.  This  latter  is  dealt  out  to  the  boys  in  approxi- 
mately equal  portions  of  an  ounce  weight,  and  is  frequently  used  by  them 
as  a  means  of  exchange  and  measure  of  value.  A  flying  squirrel  has  been 


294          PRINCIPLES  OF  POLITICAL  ECONOMY 

known  to  bring  fifteen  "butters,"  and  a  sling,  five  "butters."  The  unit  is 
subdivided  once,  the  fractional  piece  being  known  as  the  "  half-butter  "  and 
having  a  purchasing  power  about  equal  to  that  of  one  cent.  Some  boys 
who  entered  upon  the  manufacture  of  taffy  obtained  the  needed  butter  by 
buying  it  from  the  rest  at  the  price  of  two  cents  for  one  "  butter,"  payment 
being  made,  at  the  option  of  the  seller,  either  in  money  or  in  taffy. 

Their  transactions  are  often  so  complicated  that  the  boys  find  it  desir- 
able to  lessen  the  number  of  payments  of  this  novel  currency,  and  they 
employ  for  this  purpose  a  system  of  verbally  transferring  their  claims  from 
one  to  another,  somewhat  as  merchants  use  negotiable  notes.  Perhaps  A 
buys  a  knife  from  B  for  ten  "  butters."  B  has  an  outstanding  debt  of  the 
same  amount  for  marbles,  and  he  transfers  to  his  creditor  C  his  claim 
against  A,  who  pays  to  C  or  to  anyone  else  whom  C  may  designate. 

At  first  glance  this  use  of  butter  as  money  seems  laughably  odd ;  but  in 
fact  it  could  be  easily  paralleled  by  long  lists  of  articles  equally  far  removed 
from  the  gold,  silver,  and  paper  of  our  own  currency,  which  have  yet  served 
as  money  in  different  parts  of  the  world.  The  wampum  of  the  early  Indians 
is  familiar  to  all  readers,  and  Jevons  and  Roscher  enumerate,  among  many 
other  substances  that  have  been  so  used,  corn,  wolfskins,  whales'  teeth,  and 
straw  mats.  The  former  of  these  distinguished  authors  remarks  that  "  it  is 
entirely  a  question  of  degree  what  commodities  will  in  any  given  state  of 
society  form  the  most  convenient  currency  "  and  our  boy-state  being  in  a 
condition  where  butter  served  the  purpose,  its  citizens  adopted  that  com- 
modity as  their  money. 

Professor  H.  B.  Adams  added  a  footnote  to  the  above  which 
reads  as  follows  : 

At  Phillips  Exeter  Academy,  New  Hampshire,  in  my  day,  there  was  a 
pie  currency  in  vogue  among  the  boys  who  boarded  in  Abbot  Hall.  Pie  was 
something  of  a  luxury,  for  it  was  furnished  by  "  Burnham,"  the  steward,  only 
twice  a  week.  The  idea  of  value  in  exchange  was  naturally  connected  with 
our  Saturday  and  Sunday  allowance  of  pie ;  in  fact,  there  was  a  constant  trad- 
ing of  different  sorts  of  pie,  a  boy  offering  his  mince  or  custard  pie  of  one 
week  for  the  apple  or  pumpkin  pie  that  was  to  come  the  next  week.  Pie  debts 
were,  moreover,  incurred  in  a  variety  of  ways,  chiefly  for  services  rendered, 
—  for  example,  by  one's  chum  in  making  the  fire  on  a  cold  morning,  when  it 
was  not  his  turn,  or  by  one  student  aiding  another  in  his  lessons,  etc.  Boys 
would  wager  their  pie  sustenance  for  a  week,  and  sometimes  for  a  month, 
on  a  match  game  of  ball.  These  young  barbarians,  at  their  ball  play,  used 
to  rival  the  ancient  Germans,  who,  as  Tacitus  describes,  sometimes  staked 
not  only  their  property,  but  their  very  freedom  in  games  of  chance.  What 


MONEY  295 

could  be  greater  recklessness  for  a  hungry  boy  than  to  risk  his  pie  for  a 
month  on  the  is£ue  of  a  game  of  baseball?  In  ordinary  transactions  the 
unit  of  pie  value  at  Exeter  was  the  "  piece,"  which  was  served  us  on  a  special 
plate ;  but  there  were  as  many  standards  of  value  as  there  were  sorts  of  pie, 
so  that  in  the  settlement  of  a  small  debt  of  one  or  two  "  pieces,"  boys  some- 
times sought  to  pay  their  creditors  in  pie  of  an  inferior  or  less  marketable 
quality.  Poor  pie  was  like  trade  dollars.  Sometimes  a  creditor  would  find 
himself  with  an  embarrassment  of  riches.  If  his  debtors  insisted  on  paying 
off  their  obligations  on  one  day  in  one  sort  of  pie,  he  would  be  obliged  to 
eat  up  all  his  perishable  substance  at  once,  or  to  dispose  of  it  at  a  consider- 
able sacrifice. 

So  great  is  the  need  for  money  in  a  society  where  there  is 
any  exchange  of  desirable  articles  that  almost  anything  which 
is  commonly  used  and  appreciated  may  serve  the  purpose  of 
money.  Among  primitive  herdsmen,  cattle  meet  the  conditions. 
They  are  universally  esteemed  and  appreciated  ;  they  are  famil- 
iar objects  whose  value  is  generally  understood,  and  they  are 
easily  transferable.  They  lack,  however,  certain  other  qualities 
which  make  modern  metallic  money  convenient. 

Qualities  which  the  money  material  should  possess.  Jevons, 
in  his  "  Money  and  the  Mechanism  of  Exchange,"  names  seven 
qualities  which  are  desirable  in  the  material  of  which  money  is 
made.  They  are,  first,  utility  and  value  ;  second,  portability ; 
third,  indestructibility ;  fourth,  homogeneity  ;  fifth,  divisibility ; 
sixth,  stability  ;  and,  seventh,  cognrzability.  Cattle  possess  only 
the  first,  second,  and  seventh  of  these  qualities,  and  perhaps  to 
a  slight  degree  the  sixth.  That  they  are  useful  to  primitive 
herdsmen  is  rather  obvious.  They  furnish  their  own  porta- 
bility in  that  they  can  carry  themselves  about.  They  possess 
cognizability  because  all  are  familiar  with  them.  There  may 
be  a  certain  stability  also  in  their  value,  though  that  is  by 
no  means  certain.  The  skins  of  animals,  used  as  money  by 
hunting  tribes,  possess  the  same  qualities  as  cattle,  but  still 
lack  the  others  which  Jevons  deems  desirable.  The  "butters," 
as  used  in  the  rudimentary  society  mentioned  above,  seem  to 
possess  everything  except  indestructibility. 


296          PRINCIPLES  OF  POLITICAL  ECONOMY 

Precious  metals  especially  adapted.  It  has  been  found  that 
the  precious  metals,  especially  gold  and  silver,  possess  all  these 
qualities  in  superior  degree.  If  by  utility  we  mean  desirability, 
or  the  capacity  to  satisfy  a  desire,  there  is  no  doubt  that  gold 
and  silver  possess  this  quality.  If  we  were  to  take  a  narrow 
and  somewhat  puritanical  view  of  utility,  we  might  question  this. 
They  possess  portability  because  there  is  considerable  value  in 
small  bulk.  This  would  not  be  true  of  the  coarser  metals.  They 
possess  indestructibility  to  a  high  degree ;  they  do  not  corrode 
or  rust  as  iron  would.  They  possess  homogeneity  ;  that  is, 
gold  of  equal  purity  is  essentially  alike  the  world  over ;  it  may 
be  easily  standardized  as  to  quality,  so  that  one  piece  of  metal 
may  be  equally  desirable  with  every  other  piece  of  the  same  size 
and  standard  of  fineness.  They  possess  divisibility ;  that  is,  a 
piece  of  gold  or  silver  may  be  divided  into  smaller  pieces,  and 
each  of  the  smaller  pieces  will  have  a  value  in  exact  proportion 
to  its  size.  Each  may  be  melted  down  and  recombined  into 
larger  pieces,  and  each  piece  will  still  have  value  in  proportion 
to  its  size.  This  would  not  be  true  of  diamonds  and  precious 
stones,  though  these  would  possess  portability  and  indestructi- 
bility in  high  degree.  Gold  and  silver  possess  stability  of  value 
in  a  very  peculiar  sense.  Over  long  periods  of  time  they  will 
fluctuate  considerably,  but  over  short  periods  of  time,  that  is, 
from  week  to  week,  from  day  to  day,  from  hour  to  hour,  they 
will  fluctuate  very  little,  whereas  other  commodities,  such  as 
farm  products,  pig  iron,  and  other  articles  which  are  dealt  in 
largely,  fluctuate  rapidly  over  short  periods  of  time. 

Reasons  for  the  stability  of  gold  prices.  One  reason  for  the 
stability  of  the  value  of  the  precious  metals  over  short  periods 
is  that  the  mass  of  gold  or  silver  in  existence  at  any  one  time 
is  very  large  in  proportion  to  the  product  of  any  given  year. 
The  total  amount  of  wheat  in  existence  at  the  present  moment 
has  practically  all  been  produced  within  the  last  year,  or  two 
years  at  the  outside.  Of  the  total  gold  in  existence,  a  very  small 
fraction  was  produced  within  the  last  year  or  two.  Suppose 


MONEY  297 

you  had  a  large  reservoir  of  water,  fed  by  a  very  small  pipe. 
If  the  flow  through  the  small  pipe  were  to  vary  considerably 
from  day  to  day,  it  would  make  very  little  difference  in  the  total 
quantity  of  the  reservoir ;  though  if  the  increase  or  decrease 
kept  up  for  many  years,  there  might  be  a  considerable  change 
in  the  quantity  in  the  reservoir.  This  is  analogous  to  the 
case  of  gold.  The  total  quantity  in  existence  is  like  the 
quantity  of  water  in  the  reservoir ;  the  total  annual  production 
is  like  the  quantity  which  flows  into  the  reservoir  through  a 
very  small  pipe.  The  case  of  wheat  is  like  that  of  a  small 
reservoir  fed  by  a  very  large  pipe.  Any  change  in  the  quantity 
flowing  through  the  pipe  is  likely  to  make  a  considerable 
change  in  the  quantity  in  the  reservoir.  That  is  to  say,  a  large 
crop  of  wheat  in  one  year  will  make  a  great  difference  in  the 
total  quantity  available  for  the  world's  supply.  A  crop  failure, 
on  the  other  hand,  will  make  a  considerable  shortage  in  the 
world's  supply.  The  value  of  wheat,  therefore,  fluctuates  rapidly 
over  short  periods  of  time.  Since  it  would  take  a  number  of 
years  of  excess  production  of  gold  to  make  an  appreciable  dif- 
ference in  the  total  quantity  available  for  the  world's  supply, 
gold  does  not  fluctuate  much  from  day  to  day,  from  week  to 
week,  or  even  from  year  to  year. 

Since  most  of  the  transactions  in  which  we  use  money  are 
short-time  rather  than  long-time  transactions,  it  is  more  impor- 
tant that  the  money  material  be  stable  in  value  over  short  periods 
than  that  it  be  stable  in  value  over  long  periods.  Occasionally 
we  invest  our  money  in  something  which  we  expect  to  last  a 
long  time  ;  in  such  cases  we  are  interested  in  the  stability  of 
the  value  of  money  over  long  periods  ;  but  most  of  our  purchases 
are  made  from  day  to  day.  The  average  business  transaction  has 
very  little  relation  to  long  periods  of  time.  This  is  one  of  the 
principal  reasons  why  gold  and  silver  serve  the  purpose  of  a 
money  material  better  than  most  other  products.  In  this  respect 
gold  has  proved  to  be  superior  even  to  silver. 

As  to  cognizability,  the  superiority  of  gold  and  silver  over 


298 


PRINCIPLES  OF  POLITICAL  ECONOMY 


other  materials  is  not  so  great.  The  expert  can  always  apply 
tests  by  means  of  which  he  can  detect  spurious  coins,  but  the 
inexpert  usually  has  to  depend  upon  his  eyes  and  his  ears  and  his 
sense  of  touch.  But  there  are  not  many  other  substances  which 
cannot  be  adulterated  or  of  which  counterfeits  may  not  be  made. 
Gold  and  silver  are  not  particularly  wanting  in  cognizability, 
though  they  are  not  preeminently  superior  in  this  respect. 

For  certain  minor  coins,  however,  neither  gold  nor  silver  is 
well  adapted.  There  is  so  much  value  in  such  small  bulk  in 
gold,  for  example,  that  one  would  need  a  magnifying  glass  and 
tools  more  delicate  than  the  human  fingers  to  handle  gold  coins 
of  the  value  of  our  five-cent  pieces  and  one-cent  pieces.  Mere 
physical  convenience  requires  a  coarser  metal  for  these  small 
values.  Even  the  gold  dollar,  which  was  once  coined  in  the 
United  States,  proved  too  small  and  inconvenient,  and  its  coinage 
was  therefore  suspended.  The  forms  of  money  now  in  existence 
in  the  United  States  are  indicated  in  the  following  outline  : 


KINDS  OF  MONEY   IN  THE  UNITED  STATES 


COIN 


PAPER 


Gold 


f  Double  eagle 
I  Eagle 
I  Half  eagle 
[  Quarter  eagle 
f  Dollar 

Half  dollar 
Silver  1  f 

Quarter 

[  Dime 

Nickel :  Five-cent  piece 
Bronze :  One-cent  piece 

Gold  certificates 

Silver  certificates 

Treasury  notes 

United  States  notes  (greenbacks) 

National  bank  notes 

Federal  Reserve  notes 

Federal  Reserve  bank  notes 


MONEY  299 

The  coins  are  sufficiently  familiar  to  require  no  description. 
Their  differences  appeal  readily  to  the  eye.  It  is  noticeable, 
however,  that  comparatively  few  people  note  carefully  the  dif- 
ferent kinds  of  paper  currency.  Anyone  who  has  coins  in  his 
pocket  can  tell  you  instantly  to  which  class  each  coin  belongs. 
Comparatively  few  people,  however,  can  tell  you  about  the 
different  pieces  of  paper  money  in  their  pockets. 

The  first  three  forms  of  paper  currency  mentioned  in  the 
above  outline  may  be  called  warehouse  receipts.  For  the  con- 
venience of  the  people  the  Federal  Treasury  issues  these 
receipts  in  return  for  deposits  of  other  forms  of  money.  If,  for 
example,  one  has  a  large  quantity  of  gold  or  silver  coin,  and 
desires  something  more  convenient,  he  may  deposit  the  coin 
with  the  Secretary  of  the  Treasury  and  receive  in  return  gold 
or  silver  certificates.  These  merely  certify  that  the  coin  has 
been  deposited  in  the  Treasury.  These  certificates  then  circu- 
late as  money.  Gold  certificates  are  issued  against  deposits  of 
gold,  and  silver  certificates  against  deposits  of  silver.  A  silver 
certificate,  for  example,  reads  :  "  This  certifies  that  there  have 
been  deposited  in  the  Treasury  of  the  United  States  of 
America  —  —  silver  dollars,  payable  to  the  bearer  on  demand." 
The  Treasury  notes  were  issued  in  the  purchase  of  silver 
bullion  under  an  act  authorizing  such  purchase.  They  have 
almost  disappeared  from  circulation,  having  been  redeemed  by 
the  coinage  of  the  bullion  for  the  purchase  of  which  they  were 
issued.  The  United  States  note,  popularly  known  as  the  green- 
back, is  issued  by  the  Federal  government  as  pure  credit  cur- 
rency. It  has  on  its  face,  among  other  things,  "  The  United 
States  of  America  will  pay  to  the  bearer  -  -  dollars."  The 
issue  of  these  notes  was  authorized  by  act  of  Congress  during 
the  Civil  War  as  a  means  of  financing  the  war ;  that  is,  as 
a  means  of  paying  the  obligations  of  the  government.  The 
amount  then  authorized,  with  only  a  slight  reduction,  has  been 
kept  in  circulation  ever  since.  The  national  bank  notes  are 
technically  known  as  national  currency.  They  are  secured  by 


300          PRINCIPLES  OF  POLITICAL  ECONOMY 

United  States  bonds  or  other  securities  deposited  with  the 
Secretary  of  the  Treasury.  They  are  issued  to  the  bank  mak- 
ing the  deposit,  and  bear  on  their  face  the  name  of  the  bank. 
It  is  the  bank,  however,  which  agrees  to  pay,  rather  than 
the  government ;  the  government  merely  stands  back  of  the 
bank.  A  bank  note  has  on  its  face,  among  other  things,  "  The 

-  National  Bank  of  will  pay  to  the  bearer  on 

demand dollars." 

The  Federal  Reserve  notes  are  issued  to  the  Federal  Reserve 
banks  by  an  agent  of  the  United  States  Treasury.  They 
are  sent  to  the  member  banks  by  the  Federal  Reserve  banks 
in  return  for  deposits  of  commercial  paper,  and  are  then  put 
into  circulation  by  the  local,  or  member,  banks.  The  Federal 
Reserve  bank  notes  are  used  as  yet  only  to  a  small  extent. 
They  are  issued  to  the  Federal  Reserve  banks  by  the  United 
States  Treasury  in  return  for  deposits  of  government  bonds, 
being  in  all  essentials  like  the  national  bank  notes  which  they 
are  intended  to  replace. 

Standard  money.  Among  all  these  forms  of  money  there  is 
one  which  is  known  as  standard  money,  —  that  is,  gold  coin. 
The  value  of  the  gold  coin  depends  on  the  value  of  the  mate- 
rial of  which  it  is  made.  So  long  as  the  present  policy  of  the 
government  is  maintained,  the  value  of  a  gold  coin  can  never 
vary  appreciably  from  that  of  the  metal  which  it  contains.  One 
reason  for  this  is  that  the  government  will  undertake  to  coin 
all  the  gold  that  is  brought  to  the  mint  and  to  charge  nothing 
for  the  work  of  coining,  except  the  value  of  the  alloy  which  is 
put  in.  Since  this  alloy  also  has  some  value,  this  virtually 
means  that  if  you  bring  to  the  mint  not  only  the  gold  but  also 
the  other  materials  which  go  into  the  coin,  in  the  proper  ratio, 
the  government  does  the  work  of  coining  free  of  charge ;  you 
merely  supply  the  raw  material.  When,  therefore,  there  is  even 
the  slightest  tendency  for  the  value  of  coin  to  rise  above  that 
of  bullion,  men  will  anticipate  this  tendency  by  taking  bullion 
to  the  mint.  Since  coin  is  easily  melted  down  into  bullion,  if 


MONEY  301 

bullion  showed  the  slightest  tendency  to  exceed  coin  in  value, 
that  would  be  anticipated  by  melting  coin  down  into  bullion. 
These  two  processes  make  it  practically  certain  that,  so  long  as 
the  government  can  maintain  its  policy,  gold  coin  and  bullion 
will  be  identical  in  value. 

Token  currency.  Gold  is  the  only  form  of  money  now  in 
circulation  in  the  country  which  is  actually  standard  money. 
The  exchange  value  of  a  silver  coin  is  much  greater  than  that  of 
the  metal  of  which  it  is  made.  The  same  is  true  of  the  nickel 
and  bronze,  and  conspicuously  true  of  the  paper.  The  general 
name  applied  to  these  other  forms  of  money  is  token  currency. 
They  are  accepted  in  exchange  not  because  of  the  value  of  the 
material  of  which  they  are  made  but  because  they  stand  as 
tokens,  or  representatives,  of  some  other  form  of  value.  With 
the  currency  certificates,  gold  certificates,  and  silver  certificates 
this  is  perfectly  plain.  The  certificates  are  merely  tokens  rep- 
resenting that  which  has  been  deposited.  With  the  bank  notes 
it  is  equally  plain,  becafuse  the  bank  agrees  to  pay  other  forms 
of  money.  Even  with  the  silver  coins,  while  there  is  no 
direct  agreement  to  exchange  gold  for  them,  the  practice  pre- 
vails. In  addition  to  this,  and  quite  as  important  also,  is  the 
fact  that  the  government  itself  receives  all  these  forms  of 
currency  in  payment  of  obligations  to  itself.  Thus,  you  can 
pay  your  taxes,  you  can  buy  postage  stamps,  you  can  pay  cus- 
toms duties,  and  any  other  obligation  which  you  owe  to  the 
government,  in  these  other  forms  of  currency.  Technically  the 
United  States  notes,  or  greenbacks,  are  not  legal  tender  for 
payment  of  customs  dues,  but  as  a  matter  of  fact  they  are 
receivable.  By  legal-tender  currency  is  meant  any  currency 
with  which  you  can  pay  a  debt  and  compel  the  creditor  to 
take  that  or  nothing.  You  can  offer,  or  "  tender,"  him  the 
amount  of  the  debt,  and  he  cannot  demand  some  other  form  of 
currency.  Most  of  our  forms  of  currency  are  legal  tender  for 
any  amount,  except  our  smaller  coins,  which  are  legal  tender 
for  only  limited  amounts.  They  thus  represent  in  that  indirect 


302          PRINCIPLES  OF  POLITICAL  ECONOMY 

sense  a  real  value,  or  they  serve  these  valuable  purposes  for 
their  possessors.  In  the  third  place,  some  of  them  are  declared 
to  be  legal  tender ;  that  is,  you  can  pay  your  debt,  not  only  to 
the  government  but  to  anyone  else  to  whom  you  owe  money, 
by  offering  various  forms  of  token  currency  as  well  as  by 
offering  gold. 

The  question  has  frequently  been  raised,  Why  use  such  ex- 
pensive materials  as  gold  and  silver  for  money  ?  Would  not 
some  cheap  substance,  such  as  paper  or  aluminum,  serve  equally 
well  ?  Many  long  and  heated  controversies  have  been  waged 
over  this  question.  The  so-called  "hard-money"  school  have 
taken  the  position  that  the  government  cannot  make  money, 
it  can  only  stamp  money.  The  stamp  merely  serves  as  a  certifi- 
cate of  its  weight  and  fineness  ;  the  market  itself  must  then  de- 
termine its  value.  The  "  soft-money  "  school,  on  the  contrary, 
have  pointed  to  many  historic  instances  in  which  cheap  ma- 
terials have  actually  served  as  money  and  circulated  at  a  value 
which  bore  no  relation  to  the  value  of  the  substance  of  which 
it  was  made.  The  truth  seems  to  be  summarized  as  follows : 
i.  Long-established  customs,  in  a  country  such,  for  example, 
as  China,  where  custom  rules  supreme,  may  enable  a  kind  of 
money  to  circulate  at  a  customary  value  regardless  of  thd 
commercial  value  of  the  material  of  which  it  is  made.  2.  A 
government  which  is  in  the  habit  of  using  a  great  deal  of 
compulsion,  as  in  Germany,  over  a  people  who  are  in  the 
habit  of  submitting  to  authority  and  compulsion,  may  by  its 
own  decree  cause  money  to  circulate  at  legally  established 
rates  without  regard  to  the  commercial  value  of  the  substance 
of  which  it  is  made.  But  a  government  which  is  not  in  the 
habit  of  exercising  a  great  deal  of  compulsion,  and  a  people 
who  are  not  in  the  habit  of  submitting  to  it,  have  to  rely 
mainly  upon  voluntary  agreement  among  individuals  in  most 
of  the  relations  of  life.  3.  Where  voluntary  agreement  rather 
than  government  compulsion  is  mainly  depended  upon,  it  has 
hitherto  proved  impossible  to  get  people  to  voluntarily  agree 


MONEY  303 

upon  any  substance  as  the  material  for  standard  money  except 
something  which  had  a  value  as  raw  material  commensurate 
to  its  value  as  money.  4.  Cheaper  substances  may,  however, 
be  used  in  limited  quantities  as  token  money  even  in  liberal 
countries  where  everything  is  done  by  voluntary  agreement, 
(a)  when  standard  money  will  be  exchanged  for  it ;  (b]  when 
the  government  will  accept  it  in  payment  to  itself ;  (c)  in  small 
quantities  when  the  government  exercises  its  authority  by  com- 
pelling a  creditor  to  accept  it  in  payment  of  a  debt  when 
offered  by  a  debtor.  This,  however,  is  an  exercise  of  compul- 
sion, but  it  is  one  to  which  many  even  of  the  liberal  govern- 
ments resort. 


CHAPTER  XXV 
BANKING 

Need  of  institutions  to  deal  in  credit.  In  view  of  the  fact 
that  credit  supplies  so  important  a  part  of  our  circulating  me- 
dium, it  is  natural  that  a  special  class  of  institutions  should 
arise  which  deal  primarily  with  credit.  These  institutions  are 
called  banks.  The  term  bank  originally  meant  the  bench 
before  which  the  money  changer  sat,  with  his  coins  stacked 
up  before  him.  When  he  failed  in  business,  his  bench  was 
broken  up,  hence  the  word  bankrupt. 

Receiving  deposits  and  making  loans.  The  original  busi- 
ness of  the  bank  was  ostensibly  to  deal  in  money,  but  out  of 
this  has  grown  the  business  of  dealing  in  credit.  Lombard 
Street  became  the  banking  center  of  London,  from  the  fact 
that  it  was  occupied  by  goldsmiths  from  Lombardy.  They 
had  to  have  safes  in  which  to  store  their  valuables.  During 
the  turbulent  times  of  the  sixteenth  and  seventeenth  centuries 
certain  worthy  Londoners  used  to  deposit  not  only  their  valu- 
ables but  their  money  with  these  goldsmiths  for  safe-keeping. 
Having  so  much  money  on  hand,  the  goldsmiths  began  gradu- 
ally to  lend  out  small  sums,  always  taking  precautions  to  keep 
enough  on  hand  to  meet  the  demands  of  depositors  whenever 
they  were  presented.  This  business  of  receiving  deposits  and 
making  loans,  which  is  the  essence  of  all  banking,  eventually 
became  more  lucrative  than  the  trade  of  the  goldsmith.  More 
and  more,  therefore,  they  gave  up  their  original  trade  and  be- 
came dealers  in  money  and  credit ;  that  is,  receiving  deposits 
and  making  loans.  These  two  things  are  still  the  fundamental 
purposes  of  a  bank.  The  depositors  came  to  recognize  the 

3°4 


BANKING  305 

legitimacy  of  this  business,  and  it  became  respectable  and 
well  established,  and  is  now  one  of  the  most  important  of  all 
forms  of  business. 

Making  money  more  active.  While,  as  stated  above,  the 
essential  work  of  a  bank  is  to  receive  deposits  and  make  loans, 
by  doing  these  things  it  performs  certain  important  functions 
in  the  national  economy.  One  of  these  functions  is  to  take 
money  which  would  otherwise  have  remained  inactive  and  put 
it  to  work,  thus  making  it  active.  The  individual  who  has  a 
fund  of  purchasing  power  which  he  does  not  care  to  invest  for 
the  time  being  may  deposit  it  with  a  banker ;  someone  else 
who  has  an  opportunity  for  investment,  that  is,  for  the  active 
use  of  capital,  may  go  to  the  banker  and  borrow  it.  The 
banker  is  therefore  the  middleman  who  stands  between  the 
one  who  has  money  to  spare  for  which  he  has  no  immediate 
need  and  the  one  who  has  a  need  for  capital  which  he  does 
not  possess.  Without  the  banker  these  two  men  might  have 
difficulty  in  finding  each  other.  The  banker  at  least  saves 
them  time  and  trouble.  It  is  very  much  the  same  function  as 
that  performed  by  any  other  middleman.  The  producer  of 
material  products  does  not  have  time  to  peddle  his  goods 
among  consumers,  and  the  consumer  does  not  have  time  to 
search  for  a  producer  who  has  for  sale  exactly  what  he  wants 
to  buy.  Both  go  to  the  merchant,  the  one  to  sell  his  sur- 
plus, the  other  to  buy  his  supplies.  The  merchant  saves  both 
of  them  the  trouble  and  earns  an  income  in  return  for  the 
service  which  he  performs. 

Savings  banks.  The  depositor  may  prefer  to  leave  his  money 
on  deposit  for  a  long  time  or  for  a  stated  time,  or  he  may 
prefer  to  deposit  it  on  condition  that  he  may  withdraw  it  at  any 
moment  when  it  suits  his  convenience  to  do  so.  The  former 
class  of  deposits  are  commonly  called  savings  deposits,  and  the 
latter,  deposits  subject  to  check.  The  savings  banks  are  a 
special  class  which  receive  savings  deposits,  whereas  the 
ordinary  commercial  bank  receives  deposits  subject  to  check. 


306          PRINCIPLES  OF  POLITICAL  ECONOMY 

Origin  of  the  bank  check.  Originally,  when  a  depositor  in 
a  bank  wished  to  make  a  payment  to  another  person,  it  was 
necessary  for  the  depositor  to  withdraw  his  money  from  deposit 
and  hand  it  to  the  payee.  A  little  later  the  custom  grew  up 
of  going  in  person  to  the  bank  and  authorizing  the  bank  to 
transfer  a  certain  sum  from  the  payer's  to  the  payee's  account. 
The  payee  could  then  draw  out  the  money  as  he  needed  it. 
From  this  it  was  an  easy  step  to  the  custom  of  giving  the  bank 
a  written  order  to  pay  a  certain  sum  to  another  person.  This 
written  order  became  known  as  a  bank  check.  These  checks 
proved  so  convenient  that  they  became  one  of  the  principal 
means  of  making  payments.  A,  who  wishes  to  pay  money  to 
B,  merely  hands  a  check  to  B,  —  a  written  order  on  the  bank. 
B  may  then  withdraw  the  money,  or  he  may  deposit  the  check 
and  have  the  sum  transferred  from  the  payer's  account  and 
credited  to  his  own  account,  or  he  may  indorse  the  check  and 
pass  it  on  to  a  third  person.  This  third  person  may  pass  it 
on  to  a  fourth,  and  so  on  almost  indefinitely.  Sooner  or  later, 
however,  some  individual  who  receives  the  check  will  deposit 
it  with  his  own  bank.  If  it  happens  to  be  the  same  bank  on 
which  it  was  originally  drawn,  the  matter  of  transferring  the 
account  is  very  simple.  If  it  happens  to  be  another  bank,  and 
there  happen  to  be  a  great  many  banks  in  the  same  business 
center,  each  one  receiving,  in  the  course  of  the  day's  busi- 
ness, a  great  number  of  checks  on  all  the  others,  a  somewhat 
complicated  problem  is  sure  to  arise.  This  is  the  problem  of 
bank  clearings.  A  bank  draft  is  merely  a  check  on  one  bank 
drawn  by  another  bank.  A  certified  check  is  a  private  check  to 
which  the  bank  on  which  it  is  drawn  certifies,  or  the  payment 
of  which  it  guarantees. 

The  clearing  house.  The  vast  increase  in  the  use  of  bank 
checks  in  the  making  of  payments  long  ago  created  the  neces- 
sity for  a  special  institution  known  as  the  clearing  house.  At 
the  close  of  each  day's  business  every  bank  in  a  large  commer- 
cial center  finds  itself  in  possession  of  a  number  of  checks  on 


BANKING  307 

each  of  the  other  banks.  Originally  messengers  were  sent  the 
rounds,  carrying  bundles  of  checks.  This  was  both  a  cumber- 
some and  an  expensive  process.  In  order  to  save  time  and 
shoe  leather  these  messengers  formed  the  habit  of  meeting  at 
certain  places  at  certain  hours  and  exchanging  their  bundles 
of  checks,  keeping  records  of  all  such  transactions.  By  this 
simple  process  the  messenger  from  one  bank  would  receive  all 
the  checks  on  his  own  bank  from  the  messengers  from  the 
other  banks,  and  at  the  same  time  he  would  deliver  to  the 
messengers  from  each  of  the  other  banks  the  checks  on  their 
respective  banks  deposited  with  his  bank. 

From  this  it  was  an  easy  transition  to  the  organization  of  a 
regular  clearing  house,  which  eventually  became  the  heart  of 
the  whole  financial  district.  The  late  Charles  F.  Dunbar 
describes  the  process  as  follows: 1 

This  medium  of  payment  acquires  great  perfection  wherever  the  Clearing- 
House  system  is  adopted.  Under  this  system  there  is  a  daily  meeting  of 
clerks  representing  all  the  banks  carrying  on  business  at  any  common  center. 
Every  bank  there  turns  in  at  a  central  office  all  the  checks  and  cash  demands 
which  it  holds  against  others,  and  is  credited  therewith,  and  is  also 
charged  with  all  checks  and  demands  brought  against  it  in  like  manner  by 
others.  The  checks  and  demands  which  have  thus  been  credited  to  and 
charged  against  each  bank  are  then  summed  up,  and  the  balance  found  to  be 
owed  by  or  due  to  each  bank,  as  the  case  may  be,  it  then  pays  to  or  receives 
from  the  central  office  in  money.  By  this  means  a  great  mass  of  trans- 
actions, which  would  otherwise  require  a  series  of  demands  by  each  bank 
upon  every  other  in  the  same  place,  are  settled  at  once,  and  the  transporta- 
tion of  large  sums  in  cash  from  one  bank  to  another  is  to  a  great  extent 
dispensed  with. 

The  bank  deposit,  circulated  by  means  of  checks,  is  the  most  convenient 
medium  of  payment  yet  devised.  A  stroke  of  the  pen  transfers  it  in  what- 
ever amount  is  needed  for  the  largest  transaction,  and  this  transfer  instantly 
becomes  the  basis  for  fresh  operations,  with  as  complete  security  against 
accidental  loss  as  can  be  imagined.  In  the  strict  economic  sense  this 
medium  no  doubt  has  rapidity  of  circulation  in  a  high  degree,  while  in  the 
sense  of  actual  activity  of  movement  in  a  given  time  it  far  outstrips  money 

1  The  Theory  and  History  of  Banking.  Third  edition,  enlarged  by  Oliver 
M.  W.  Sprague.  G.  P.  Putnam's  Sons,  New  York  and  London,  1917. 


308          PRINCIPLES  OF  POLITICAL  ECONOMY 

or  notes,  and  has  been  well  said  to  be  the  most  volatile  of  all  the  mediums 
of  exchange.  Of  the  entire  circulating  medium  of  this  country,  it  forms 
incomparably  the  greatest,  although  the  least  considered,  part.  Depending 
for  its  efficiency  solely  upon  convention,  it  for  the  most  part  eludes  the 
regulations  which  legislatures  so  industriously  enforce  upon  the  other  con- 
stituents of  the  currency.  Indeed,  beyond  the  requirement  of  a  minimum 
reserve  made  by  the  law  of  the  United  States,  and  of  most  of  the  several 
states,  we  may  say  that  the  subject  is  not  touched  by  legislation,  in  this 
country  or  elsewhere.  The  necessity  for  payment  in  specie  or  legal-tender 
paper  upon  demand,  the  chief  safeguard  of  value,  is  the  result  of  general 
provisions  for  the  payment  of  debts  of  any  kind.  And  the  chief  assurance 
against  excessive  expansion  on  the  part  of  any  single  bank  or  banker  is 
given  by  the  certain  demand  for  prompt  and  frequent  settlement  occasioned 
by  the  voluntary  establishment  of  the  clearing  house,  or  by  the  habits  of 
the  community,  but  not  by  law. 

Since  the  above  was  written,  the  Federal  Reserve  Act  has 
been  passed  and  the  Federal  Reserve  system  put  into  operation 
in  the  United  States.  Dunbar's  description  of  the  essential 
methods  of  clearing  still  applies,  but  most  of  the  bank  clearings 
in  this  country  are  now  done  through  the  Federal  Reserve 
banks.  The  clearing  house  is  essentially  a  banker 's  bank,  where 
banks  make  their  payments  to  and  collect  their  obligations  from 
one  another  very  much  as  private  individuals  who  do  business 
with  the  same  bank  make  their  payments  to  and  collect  their 
obligations  from  one  another.  The  Federal  Reserve  banks  are 
now  in  a  peculiar  sense  fitted  to  act  as  the  bank  for  the  member 
banks,  thus  taking  the  place  of  the  clearing  house. 

When  you  make  a  payment  to  someone  in  another  city, 
with  whom  you  have  business  relations  or  who  knows  you 
and  your  solvency,  a  very  convenient  method  is  to  send  him 
a  check  on  your  own  local  bank.  He  will  then  present  your 
check  to  his  own  bank  for  collection.  His  bank  will  usually 
credit  him  at  once  with  the  amount  for  which  the  check  is 
drawn,  and  then  send  the  check  through  a  regular  groove. 
Usually  it  will  send  the  check  to  the  Federal  Reserve  bank  of 
its  district,  and  this  Federal  Reserve  bank  will  send  it  either  to 
the  bank  on  which  it  is  drawn  or,  if  that  bank  is  in  another 


BANKING  309 

district,  to  the  Federal  Reserve  bank  of  that  district,  which  will, 
in  turn,  send  it  to  the  bank  on  which  it  is  drawn.  When  the 
check  gets  back  to  you,  you  can  trace  its  course  by  the  indorse- 
ments on  its  back.  Sometimes  the  banks  find  it  necessary  to 
charge  a  small  fee  for  collecting  a  check  of  this  kind. 

Bank  checks  do  not  circulate  quite  so  freely  among  private 
individuals  as  money,  because  each  check  must  be  indorsed  by 
each  person  through  whose  hands  it  passes.  Therefore  a 
check  will  be  accepted  only  from  a  person  whose  signature  is 
known  to  be  genuine.  Since,  however,  paper  money  circulates 
without  indorsement,  one  will  accept  it  from  a  stranger  or  a 
known  rogue  unless  one  has  reasons  for  suspecting  the  money 
to  be  counterfeit. 

Bank  notes.  Certain  banks,  such  as  national  banks,  have 
been  permitted  to  perform  the  special  function  of  issuing  bank 
notes  and  thus  providing  a  circulating  medium  which  answers 
the  purpose  of  money  if  it  is  not  itself  a  form  of  money. 
These  notes  have  circulated  from  hand  to  hand  in  all  respects 
as  money.  They  differ  from  the  notes  of  an  ordinary  individual 
in  that  they  pass  from  hand  to  hand  without  indorsement. 
The  note  of  an  individual  may  circulate  to  a  certain  extent, 
but  the  laws  and  customs  of  business  require  that  it  be  in- 
dorsed by  everyone  through  whose  hands  it  passes.  In  that 
important  respect  the  private  note  differs  from  money.  It  is 
the  custom  for  a  modern  bank  note  to  pass  from  hand  to  hand 
in  full  payment  of  all  obligations,  without  indorsement  and 
without  any  regard  to  the  honesty  or  credit  of  the  individual 
who  offers  it  in  purchase  of  a  commodity  or  in  payment  of  a  debt. 

The  Bank  of  England.  In  some  historic  cases  this  custom 
of  issuing  notes  has  grown  up  without  the  authority  of  the 
government  and  without  any  special  help  from  the  government, 
precisely  as  the  custom  of  receiving  deposits  and  making  loans 
has  grown  up.  In  most  modern  countries,  however,  where 
bank  notes  are  allowed  to  circulate,  they  are  not  only  authorized 
by  law  but  very  carefully  supervised  and  safeguarded.  The 


310          PRINCIPLES  OF  POLITICAL  ECONOMY 

Bank  of  England,  for  example,  occupies  a  position  with  respect 
to  the  British  government  somewhat  similar  to  the  position 
which  an  ordinary  bank  in  this  country  occupies  with  respect 
to  one  of  its  largest  customers.  The  British  government 
maintains  no  separate  treasury  of  its  own,  but  deposits  any 
surplus  money  which  it  may  have  with  the  bank,  just  as  a 
private  firm  deposits  its  surplus  money  with  its  own  bank. 
The  British  government  makes  its  payments  by  orders  on  the 
bank,  very  much  as  a  private  firm  would  make  its  payments 
by  check  on  its  own  bank.  When  the  British  government 
desires  to  borrow  money,  except  in  extraordinary  cases,  it  has 
generally  borrowed  through  its  own  bank,  the  bank  merely 
serving  as  the  agent  of  the  government  in  this  respect. 

In  return  for  various  services  which  the  bank  has  performed, 
it  has  been  permitted  to  issue  bank  notes  up  to  a  certain  extent, 
17>775>oo°  pounds,  secured  by  debts  of  the  government  to  the 
bank,  and  to  keep  them  in  circulation  very  much  as  other  forms 
of  money  are  circulated.  Beyond  this  quantity  it  was  permitted 
to  issue  notes  only  under  the  most  rigid  restrictions.  All  its 
additional  notes,  in  normal  times,  are  virtually  warehouse  re- 
ceipts similar  to  our  gold  and  silver  certificates.  That  is  to 
say,  for  every  note  issued  an  equivalent  in  gold  has  had  to  be 
deposited  with  the  bank.  These  notes  were  merely  conven- 
iences to  the  general  public.  An  individual  who  did  not  wish 
to  carry  a  large  quantity  of  gold  could  take  it  to  the  bank, 
deposit  it,  and  get  notes  instead.  The  notes  are  issued  only 
in  large  denominations.  Since  the  outbreak  of  the  present 
world  war  the  restrictions  upon  the  issue  of  notes  have  been 
removed,  so  that,  for  the  time  being,  the  Bank  of  England 
is  permitted  to  issue  notes  at  will. 

The  old  bank  of  the  United  States.  In  this  country  the  old 
bank  of  the  United  States  was  chartered  in  1791  for  twenty 
years.  A  new  charter  was  refused  in  1 8 1 1 ,  and  it  went  out  of 
existence.  A  second  bank,  similar  to  the  first,  was  chartered 
in  1816,  to  run  for  twenty  years.  Both  these  banks  served 


BANKING  311 

much  the  same  purpose  as  the  Bank  of  England ;  that  is,  the 
United  States  Bank  was  in  a  sense  the  banker  of  the  Federal 
government.  It  went  out  of  existence,  however,  in  1836,  hav- 
ing failed  to  secure  a  new  charter,  partly  through  the  opposition 
of  President  Jackson. 

The  national  banking  system.  In  1863  the  foundation  of 
our  present  national  banking  system  was  laid,  and  a  series 
of  national  banks  was  created,  partly  as  a  means  of  making  a 
market  for  the  bonds  which  the  Federal  government  was  offer- 
ing for  sale  in  order  to  get  money  with  which  to  carry  on  the 
Civil  War.  Any  bank  chartered  under  this  act  was  permitted 
to  deposit  bonds  of  the  United  States  with  the  Secretary  of 
the  Treasury,  and  in  return  for  these  deposits  it  was  permitted 
to  circulate  bank  notes  up  to  90  per  cent  of  the  value  of 
the  bonds  deposited.  Thus,  if  the  bank  failed,  the  government 
had  possession  of  enough  of  its  property  to  redeem  all  the  notes 
which  it  had  issued.  In  a  sense,  the  bank  had  pawned  valuable 
property  (that  is,  government  bonds),  and  received  a  kind  of 
pawn  check  in  return.  These  "checks,"  called  bank  notes,  it 
was  permitted  to  circulate.  This  is  essentially  the  characteristic 
of  our  bank  notes  to  the  present  day.  Subsequent  acts  have 
made  some  changes  in  the  system,  particularly  the  act  of  1908, 
which  permits  a  national  bank  to  deposit  certain  other  securities 
besides  United  States  bonds  as  a  basis  for  its  note  circulation. 

The  Federal  Reserve  system.  The  most  important  piece  of 
banking  legislation  in  this  country  since  the  National  Bank 
Act  of  1863  was  the  Federal  Reserve  Act  of  1913.  Under 
this  act  there  was  created  under  the  Treasury  Department  of 
the  United  States  a  Federal  Reserve  board  consisting  of  five 
members,  besides  the  Secretary  of  the  Treasury  and  the  Comp- 
troller of  the  Currency,  charged  with  the  general  administration 
of  the  national  banking  system.  The  country  was  then  divided 
into  twelve  districts,  and  within  each  district  a  city  was  selected, 
to  be  called  a  Federal  Reserve  city.  The  cities  chosen  were 
Boston,  New  York,  Philadelphia,  Cleveland,  Richmond,  Atlanta, 


312          PRINCIPLES  OF  POLITICAL  ECONOMY 

Chicago,  St.  Louis,  Minneapolis,  Kansas  City,  Dallas,  and 
San  Francisco.  In  each  of  these  cities  was  organized  a  Federal 
Reserve  bank.  This  bank  was  to  be  the  central  bank  of  the 
Federal  Reserve  system  in  the  district  within  which  it  was 
located.  All  the  national  banks,  and  all  the  state  banks  which 
wished  to  become  national  banks,  by  coming  in  under  the 
Federal  Reserve  system  were  to  become  member  banks  and  in 
a  sense  tributary  to  the  Federal  Reserve  bank.  They  have  a 
voice  in  the  control  of  the  Federal  Reserve  bank  of  their  own 
district.  Each  member  bank  is  required  to  subscribe  to  the 
capital  of,  and  to  keep  all  of  its  required  reserves  on  deposit 
with,  the  Federal  Reserve  bank  of  its  district.  The  Federal 
Reserve  bank  thus  becomes,  in  a  sense,  the  bank  of  the  member 
banks  of  its  own  district.  It  does  no  business  directly  with  pri- 
vate individuals,  aside  from  the  purchase  of  bills  of  exchange 
in  the  open  market.  The  Federal  Reserve  banks  themselves 
carry  on  their  clearing  through  a  special  branch  of  the  Federal 
Reserve  board  in  Washington.  This  may  be  called  the  bank 
of  the  Federal  Reserve  banks. 

The  general  purposes  of  the  Federal  Reserve  system  may 
be  summarized  under  three  heads :  first,  the  provision  of  a 
general  and  well-organized  market  for  the  selling  of  commercial 
paper ;  second,  the  pooling  of  the  reserves  of  existing  banks ; 
third,  the  provision  of  an  elastic  currency.  The  first  and 
second  of  these  purposes  are  provided  for  partly  by  the  require- 
ment that  each  member  bank  shall  keep  a  part  of  its  funds 
on  deposit  with  the  Federal  Reserve  bank  of  its  district.  In 
return  for  this  the  Federal  Reserve  bank  is  to  take  commer- 
cial paper,  that  is,  notes  and  other  promises  to  pay  money  to 
the  bank,  and  send  it  money  instead.  Thus,  an  individual  who 
wishes  to  borrow  money  from  the  bank  gives  it  his  own  per- 
sonal note,  properly  secured.  When  the  bank  has  a  large 
batch  of  these  notes  and  other  obligations  to  pay  money,  and 
needs  more  cash,  it  can  indorse  these  notes  and  "  sell "  them 
for  cash  to  the  Federal  Reserve  bank. 


BANKING  313 

The  first  two  purposes  are  partly  provided  for  by  the  organi- 
zation of  all  the  clearings  among  member  banks  through 
the  Federal  Reserve  banks  and  among  the  Federal  Reserve 
banks  through  the  Federal  Reserve  board. 

The  purpose  of  providing  an  elastic  currency  is  carried  out 
in  the  plan  for  the  issuing  of  bank  notes.  Two  classes  of  notes 
are  provided  for  under  the  system :  first,  Federal  Reserve 
notes,  and,  second,  Federal  Reserve  bank  notes.  The  Federal 
Reserve  notes  are  issued  to  member  banks  by  the  Federal  Re- 
serve banks  in  return  for  securities  of  various  kinds.  For  ex- 
ample, when  a  member  bank  sends  in  a  batch  of  personal  notes 
and  other  obligations  and  asks  for  cash,  it  may  get  its  cash  in 
the  form  of  Federal  Reserve  notes.  These  notes  are  issued  to 
the  Federal  Reserve  banks  themselves  by  a  government  official 
known  as  a  Federal  Reserve  agent.  Over  a  billion  and  a  half 
of  these  notes  have  been  issued,  and  it  is  expected  that  they 
will  increase. 

Not  much  use  has  been  made  as  yet  (1918)  of  the  Federal 
Reserve  bank  notes.  They  are  based  upon  government  bonds 
which  are  deposited  with  the  Treasury  Department,  just  as  is 
the  case  with  national  bank  notes. 

It  is  the  Federal  Reserve  notes,  rather  than  the  Federal  Reserve 
bank  notes,  which  give  elasticity  to  the  currency.  When  busi- 
ness is  active  and  the  member  banks  are  doing  a  large  lending 
business,  that  is,  lending  a  great  deal  of  money  to  individuals 
and  firms,  they  will,  of  course,  have  received  as  security  many 
personal  notes  and  other  obligations.  By  sending  them  in  large 
batches  to  the  Federal  Reserve  banks  they  get  large  quantities 
of  Federal  Reserve  notes,  which  they  proceed  to  lend  out,  receiv- 
ing other  notes  and  obligations  in  turn.  By  repeating  this 
process  they  put  large  quantities  into  circulation  when  money  is 
needed  or  demanded.  When  the  lending  business  is  slack,  that 
is,  when  there  is  not  much  demand  for  money,  fewer  of  these 
notes  are  put  into  circulation.  Thus  the  supply  automatically 
adjusts  itself  to  the  demand. 


314          PRINCIPLES  OF  POLITICAL  ECONOMY 

A  national  bank  in  this  country  is  any  bank  which  is  char- 
tered under  Federal  law  as  distinguished  from  state  law.  With 
the  exception  of  the  first  and  second  banks  of  the  United 
States,  the  banks  chartered  under  the  National  Bank  Act,  re- 
ferred to  above,  and  those  organized  under  the  present  Federal 
Reserve  system,  all  banks  in  the  United  States  are  chartered 
under  state  laws  and  are  therefore  state  banks.  Before  the 
Civil  War  many  state  banks  issued  bank  notes.  In  many  of 
the  states  the  regulation  and  inspection  were  very  inadequate, 
and  the  state  banks  were  permitted  to  issue  notes  which  they 
could  not  redeem  ;  that  is,  for  which  they  could  not  exchange 
lawful  money  when  they  were  presented.  These  came  to  be 
known  as  wildcat  banks.  Since  the  establishment  of  the 
national  banking  system  during  the  Civil  War  the  privilege  of 
issuing  bank  notes  has  been  reserved  for  banks  chartered 
and  controlled  by  the  Federal  government,  —  that  is,  to 
national  banks. 

Agricultural  credit.  The  business  of  agriculture  has  been 
the  slowest  of  all  to  make  a  large  use  of  credit.  One  reason 
has  been  that  there  has  been  no  machinery  designed  to  provide 
the  farmers  with  the  kind  of  credit  which  they  have  needed,  as 
the  ordinary  banks  have  provided  the  merchants  and  manufac- 
turers with  the  kind  which  they  have  needed.  The  farmer 
needs  comparatively  little  short-time  credit,  as  the  merchant 
and  manufacturer  understand  that  term.  The  bank  which  does 
a  regular  check  and  deposit  business,  whose  deposits  are  con- 
tinually being  withdrawn  and  replenished,  must  keep  its  assets 
in  liquid  form.  Farm  mortgages  are  notoriously  hard  to  dis- 
pose of,  and  no  commercial  bank  would  feel  safe  if  it  loaned  a 
large  proportion  of  its  deposits  out  on  that  kind  of  security. 

Even  what  the  farmer  calls  short-time  credit  is  too  long  for 
the  average  bank.  The  farmer  can  seldom  use  credit  for  less 
than  three  months,  and  he  is  more  likely  to  need  it  for  six, 
nine,  or  twelve  months,  whereas  the  city  borrowers  generally 
borrow  for  shorter  periods,  such  as  thirty,  sixty,  or  ninety  days. 


BANKING 


315 


The  farmer's  chief  need,  however,  is  for  long-time,  or  mort- 
gage, credit  rather  than  for  short-time,  or  personal,  credit.  In 
the  purchase  of  a  farm,  in  the  making  of  durable  improve- 
ments, or  even  in  the  stocking  or  equipping  of  the  farm,  con- 
siderable sums  of  money  are  required.  If  he  borrows  for 
these  purposes,  he  can  scarcely  hope  to  pay  off  his  debt  inside 
of  a  term  of  years.  The  mortgage  is  the  only  satisfactory  form 
of  security  in  cases  of  this  kind. 

A  very  important  development  of  our  banking  system,  de- 
signed to  extend  credit  facilities  to  the  farmers  of  the  country, 
was  begun  by  the  act  of  1916,  inaugurating  our  farm  land  bank 
system.  The  general  organization  of  this  system  resembled 


that  of  the  Federal  Reserve  system.  It  is  presided  over  by  a 
central  body  known  as  the  Farm  Loan  Board.  The  country  was 
divided  into  twelve  districts,  and  in  each  district  a  city  was  se- 
lected as  a  headquarters  for  the  Farm  Land  Bank.  The  Farm 
Land  Bank  was  to  operate  throughout  its  own  district  in  the 
organization  of  local  Farm  Loan  Associations ;  it  was  to  handle 
the  securities  and  to  discount  mortgages  sent  to  it  from  the 
Farm  Loan  Associations  in  its  district. 

Each  Farm  Loan  Association  is  to  be  an  association  of  farm 
owners,  or  those  about  to  become  owners,  who  desire  to  borrow 
money  on  the  security  of  a  farm  mortgage.  The  individual 
farmer  is  to  deal  only  with  his  local  association.  A  group  of 
farmers  form  themselves,  according  to  specified  rules  and  plans, 
into  a  Farm  Loan  Association.  Each  one  who  wishes  to  borrow 


316         PRINCIPLES  OF  POLITICAL  ECONOMY 

money  gives  a  mortgage  on  his  farm  to  the  association.  The 
association  then  indorses  the  mortgages  received  from  its  own 
members  and  sends  them  to  the  Farm  Land  Bank  of  the  district. 
The  Farm  Land  Bank  then  advances  the  money  to  the  Farm  Loan 
Association,  and  the  association  in  turn  advances  the  money  to 
each  of  the  farmers. 

When  the  Farm  Land  Bank  has  a  sufficient  number  of  mort- 
gages transferred  to  it  in  this  way,  it  may  deposit  these  mort- 
gages with  a  custodian  appointed  by  the  Farm  Loan  Board,  and 
it  is  then  empowered  to  issue  bonds  to  an  equal  amount  and 
offer  these  bonds  for  sale  to  the  general  investing  public.  With 
the  money  received  as  the  proceeds  of  these  sales  of  bonds  it 
may  buy  more  mortgages  from  the  local  Farm  Loan  Associations 
within  the  district.  On  the  basis  of  these  new  mortgages  it 
may  issue  more  bonds,  and  so  on  till  its  outstanding  bonds 
equal  twenty  times  the  capital  of  the  Farm  Land  Bank. 

Authority  as  shown  in  the  chart  proceeds  from  the  Farm  Loan 
Board  to  the  Farm  Land  Bank,  and  from  the  Farm  Land  Bank 
to  the  Farm  Loan  Association.  The  mortgages  are  passed  in  the 
opposite  direction,  —  first,  from  the  individual  farmer  to  the 
Farm  Loan  Association,  then  from  the  Farm  Loan  Association 
to  the  Farm  Land  Bank,  and,  finally,  from  the  Farm  Land  Bank 
to  the  Farm  Loan  Board.  The  money  proceeds,  in  exchange  for 
bonds,  from  the  individual  investor,  who  is  a  part  of  the  gen- 
eral public,  to  the  Farm  Land  Bank,  which  in  turn  forwards 
it,  in  exchange  for  mortgages,  to  the  Farm  Loan  Association, 
which  finally  passes  it  on,  in  exchange  for  mortgages,  to  the 
individual  farmers. 

The  fundamental  advantage  of  this  system  is  that  it  greatly 
increases  the  supply  of  loanable  capital  which  is  available  for 
the  farmer  borrowers.  When  the  farmer  has  to  borrow  directly 
from  the  general  public,  giving  a  mortgage  as  security,  only  a 
small  fraction  of  the  people  who  have  money  to  lend  or  invest 
are  in  a  position  to  take  his  mortgage.  Each  mortgage  requires 
close  inspection,  not  only  as  to  the  value  of  the  property 


BANKING  317 

mortgaged,  but  also  as  to  the  laws  of  the  state,  the  form  in 
which  the  mortgage  is  drawn,  and  a  number  of  minor  details. 
Only  a  few  are  expert  enough  to  make  this  inspection.  The 
inexpert  investors  must  look  for  investments  which  do  not  re- 
quire such  close  inspection.  But  under  this  new  system  anyone, 
however  inexpert,  who  has  a  little  money  to  lend  or  invest  can 
as  safely  buy  a  bond  of  a  Farm  Land  Bank  as  any  other  form  of 
security.  This  will  put  at  the  disposition  of  the  farmer  borrower 
a  vast  fund  of  loanable  capital  from  which  he  was  formerly  shut 
off  completely. 


CHAPTER  XXVI 

MARKETING 

One  very  important  topic  under  the  general  subject  of 
exchange  is  that  of  marketing.  This  has  to  do  with  the 
actual  process  of  rinding  buyers  for  that  which  has  been  pro- 
duced, or,  in  more  abstract  terms,  with  the  bridging  of  the 
gap  which  separates  producer  and  consumer. 

Essentials  of  successful  marketing.  There  are  four  essentials 
to  the  easy  and  successful  marketing  of  any  commodity.  In  the 
first  place,  it  must  be  of  good  quality,  that  is,  of  the  quality 
which  is  desired  by  the  buyers.  In  the  second  place,  the  product 
must  be  so  graded  or  standardized  that  the  buyer  can  buy  it 
without  inspection.  The  buyer  of  a  farm  product,  for  example, 
who  must  inspect  it  in  order  to  test  its  quality,  must  necessarily 
waste  a  great  deal  of  time  and  energy  in  the  process.  Time 
and  energy  are  expensive.  In  order  to  save  his  time  and  do 
a  large  business  at  the  minimum  labor  cost,  he  must  insist  on 
buying  such  products  as  have  been  graded  and  standardized 
so  that  he  can  order  by  grade  and  without  inspection.  In  the 
third  place,  the  product  must  be  in  some  way  stamped  or 
branded,  and  the  stamp  or  brand  must  be  safeguarded  as  care- 
fully as  a  banker  would  safeguard  his  signature  or  the  govern- 
ment its  seal.  Any  individual  or  association  which  permits 
inferior  or  ungraded  products  to  go  under  its  stamp  or  brand 
must  eventually  suffer  loss ;  the  reputation  of  the  stamp  or 
brand  will  be  destroyed,  and  buyers  will  thereafter  place  no 
confidence  in  it.  In  the  fourth  place,  the  public  must  be  edu- 
cated as  to  the  meaning  of  the  grades  and  standards,  and  the 
stamps,  brands,  or  trade-marks,  in  order  that  it  may  be  aware 
of  the  desirability  of  buying  without  inspection,  and  of  the 
possibilities  in  that  direction. 

318 


MARKETING  319 

Unless  the  producers  themselves  will  undertake  to  do  these 
four  things,  the  consumers  will  never  consent  to  buy  any  large 
proportion  of  the  product  directly.  The  consumer  will  insist 
on  saving  his  time,  even  at  the  loss  of  some  money  in  the 
way  of  higher  prices.  The  producer  will  not  be  able  to  get 
the  advantage  of  those  higher  prices,  and  there  will  be  a  con- 
siderable spread  between  the  price  which  the  producer  gets  and 
that  which  the  consumer  pays.  This  spread  will  be  absorbed 
by  those  middlemen  who  buy  the  ungraded,  nondescript  prod- 
ucts directly  from  the  producers,  in  a  form  in  which  the  con- 
sumers do  not  generally  want  them  at  all,  and  then  put  those 
products  into  such  forms  as  will  satisfy  the  consumers. 

Special  difficulties  in  marketing  farm  produce.  The  mar- 
keting of  farm  products  is  the  least  organized  and  probably 
the  least  efficient  part  of  our  whole  marketing  system.  This  is 
probably  inherent  in  the  very  nature  of  agricultural  production. 
From  the  standpoint  of  production  the  advantages  appear  to 
be  very  definitely  on  the  side  of  the  small  producer.  A  small 
farmer,  being  able  to  produce  more  economically  than  the 
large  farmer,  continues  to  hold  the  field.  But  he  is  at  a  pecul- 
iar disadvantage  in  the  marketing  of  his  own  produce.  Even 
if  he  were  able  to  grade  and  standardize  his  produce,  the  diffi- 
culty of  educating  the  public  to  the  meaning  of  his  brand 
would  be  insuperable.  He  has  so  little  to  sell  that  the  cost  of 
advertising  would  eat  up  the  profits.  To  put  it  in  another  way, 
the  public  would  soon  become  bewildered  if  every  one  of  the 
millions  of  farmers  of  this  country  tried  to  create  a  special 
market  for  his  own  individual  products. 

From  the  standpoint  of  marketing,  the  bonanza  farmer  has 
a  great  advantage.  In  some  cases,  that  is,  in  the  production 
of  certain  agricultural  specialties,  such  as  fancy  fruits  and 
vegetables,  breeding  animals,  and  race  horses,  this  advantage 
in  marketing  is  so  great  as  to  more  than  balance  the  disad- 
vantage in  production.  This  is  probably  due  to  the  nature  of  an 
agricultural  specialty.  The  great  staple  crops,  on  which  the 


320          PRINCIPLES  OF  POLITICAL  ECONOMY 

world  must  in  the  main  be  fed,  are  not  so  difficult  to  market 
as  are  specialties.  In  the  production  of  these  great  staple  crops 
the  advantage  will  remain  probably  on  the  side  of  those  who 
can  reduce  the  cost  of  production  to  the  minimum,  rather  than 
on  the  side  of  those  who  can  market  most  effectively.  But  in 
the  case  of  agricultural  specialties,  where  marketing  is  more 
difficult,  the  advantage  will  probably  remain  on  the  side  of 
those  who  can  market  effectively  rather  than  on  the  side  of 
those  who  can  reduce  the  cost  of  production  to  the  lowest 
point.  The  large  producing  unit  can  do  its  own  grading  and 
standardizing,  can  adopt  its  own  trade-mark  or  brand,  and  can 
advertise  more  effectively  than  the  small  producing  unit.  This 
will  probably  keep  the  production  of  agricultural  specialties  in 
the  hands  of  large  producers,  at  least  for  some  time  to  come. 
The  only  chance  which  the  small  farmer  will  have  in  the  field 
of  agricultural  specialties  is  through  cooperation. 

Cooperative  marketing.  It  will  be  observed  that  there  is 
very  little  cooperative  farming  in  this  country  or  anywhere  else. 
There  is  a  great  deal  of  cooperation  among  farmers,  especially 
in  European  countries  ;  but  this  cooperation  is  really  cooperative 
marketing.  The  farm  as  a  productive  unit  is  managed  inde- 
pendently and  separately,  but  the  products  of  a  great  many  farms 
are  marketed  cooperatively.  This  gives  the  double  advantage  of 
economic  production  in  small  units  and  efficient  marketing  in 
large  units.  On  the  whole,  it  looks  like  an  ideal  arrangement. 

This  distinction  between  production  and  marketing  will 
throw  light  on  certain  problems  in  business  organization  out- 
side of  agriculture.  The  so-called  trust  is  primarily  a  market- 
ing organization  rather  than  a  producing  organization.  A  large 
number  of  independent  companies,  operating  independent  fac- 
tories, join  together  for  a  common  management.  This  may 
result  in  some  reorganization  of  the  work  of  production,  but  in 
the  main  it  works  a  reorganization  in  the  methods  of  selling  the 
product,  of  buying  the  raw  materials,  of  hiring  labor,  or  of  bar- 
gaining for  transportation.  It  is  probable  that  some  economies 


MARKETING  321 

are  introduced  into  production ;  but  even  if  no  economies 
of  production  were  secured,  the  trust  might  succeed  by  reason 
of  its  superior  bargaining  power.  If,  by  reason  of  its  magnitude 
and  the  perfection  of  its  organization,  it  can  bargain  for  better 
transportation  rates  than  independent  producers  can  get,  it  may 
beat  them  out  in  competition.  In  the  earlier  days  of  the  trust 
movement  this  was  an  important  factor  in  its  success.  Again, 
if  the  trust  can  get  control  of  a  source  of  raw  material,  or, 
through  its  organization,  can  bargain  to  better  advantage  for 
its  raw  materials,  it  likewise  has  an  advantage  over  its  inde- 
pendent competitors.  Or  if  it  can  secure  its  labor  on  better 
terms,  it  will  have  another  advantage.  In  the  main,  however, 
its  chief  advantage  lies  in  its  superior  facilities  in  marketing. 
Having  its  selling  organization  highly  perfected  and  its  agents 
everywhere,  it  can  take  advantage  of  every  possible  fluctuation 
in  demand,  and  thus  secure  a  legitimate  advantage.  Unfortu- 
nately it  is  also  able  to  manipulate  the  market,  to  discriminate 
in  prices  between  localities  as  well  as  between  persons,  and 
thus  to  gain  an  illegitimate  advantage  over  its  independent  rivals. 
The  advantages  of  the  huge  department  store  are  likewise  in  the 
field  of  bargaining  rather  than  in  the  field  of  productive  service. 
Social  advantages  of  a  good  marketing  system.  There  is 
little  danger  that  any  farmers'  association  will  ever  reach  a 
magnitude  or  a  perfection  of  organization  which  will  permit  it 
to  discriminate  in  prices  against  certain  localities  or  individuals. 
There  is  therefore  little  danger  that  it  will  ever  be  able  to 
secure  an  illegitimate  advantage.  It  may,  however,  reach  a 
magnitude  and  a  perfection  of  organization  which  will  enable 
it  to  take  advantage  of  whatever  fluctuations  the  market  shows 
and  thus  gain  a  legitimate  profit.  If,  for  example,  in  an  un- 
organized market,  too  much  of  a  certain  kind  of  produce  should 
be  sent  to  one  city,  some  of  it  would  either  go  to  waste  or  be 
very  ineffectively  consumed ;  that  is,  be  used  for  unimportant 
purposes.  If,  at  the  same  time,  too  little  were  sent  to  another 
locality,  there  its  marginal  utility  would  be  high.  The  total 


322          PRINCIPLES  OF  POLITICAL  ECONOMY 

supply  of  the  commodity  would  yield  more  satisfaction  if  it 
were  redistributed.  A  community  which  was  oversupplied  would 
lose  very  little  by  having  its  supply  slightly  reduced  ;  whereas 
a  community  which  was  undersupplied  would  gain  considerably 
by  having  its  supply  slightly  increased.  There  would  thus  be 
a  net  gain  to  society  through  the  redistribution.  A  large  and 
efficient  selling  organization  can  frequently  prevent  such  a  bad 
geographical  distribution  of  produce,  and  thus  avoid  loss  to  the 
community.  In  so  far  as  it  achieves  this  result,  it  is  rendering 
a  valuable  service  to  the  nation  and  is  entitled  to  profit  by  it. 

Standardization  a  government  function.  There  may  be 
some  questions  as  to  what  part  the  government  can  properly 
take  in  the  improvement  of  marketing  methods  and  facilities. 
Whatever  differences  of  opinion  may  exist  with  respect  to 
other  functions  of  government,  little  is  said,  or  can  be  said, 
against  coining  money  and  fixing  the  standards  of  weights  and 
measures.  Though  these  two  functions  are  grouped  together 
in  the  same  clause  of  our  Federal  Constitution,  it  is  doubtful 
if  it  is  generally  realized  how  close  is  the  logical  connection 
between  them.  Both  result  in  great  economy  of  effort  in  the 
transfer  of  goods.  The  economy  involved  in  transferring  coined 
money  rather  than  uncoined  metal  is  apparent.  Coining  the 
metal  merely  enables  it  to  pass  from  hand  to  hand  without  the 
labor  of  inspection ;  that  is,  without  weighing  it  to  determine 
its  quantity  and  without  testing  it  to  determine  its  quality.  It 
sells  (if  we  may  speak  of  selling  money)  on  grade  and  reputa- 
tion rather  than  on  inspection.  It  is  the  most  salable  of  all 
commodities,  and  the  fact  that  it  is  so  standardized  as  to  make 
inspection  unnecessary  on  the  part  of  the  buyer  has  a  great 
deal  to  do  with  giving  it  its  superior  salability.  By  the  same 
process  of  standardization  any  other  commodity  may  approach 
gold  coin  in  salability,  though  it  may  not  quite  reach  it.  At 
least  it  is  safe  to  say  that  whenever  it  can  be  sold  entirely 
on  grade  and  reputation,  and  absolutely  without  inspection,  its 
salability  will  be  enormously  increased. 


MARKETING  323 

Standards  for  measuring  quantity.  A  short  step  is  taken  in 
the  direction  of  standardizing  other  commodities  when  the  state 
establishes  uniform  standards  for  determining  quantity ;  that  is, 
when  it  fixes  the  standard  of  weights  and  measures.  Without 
some  uniform  system  even  our  present  methods  of  selling 
would  be  much  more  clumsy  and  wasteful.  Every  buyer  would 
have  to  have  his  own  system  for  determining  the  quantity  of 
his  purchases.  This  falls  short,  however,  in  two  important 
particulars,  of  what  is  accomplished  when  metal  is  coined  in 
a  modern  mint.  In  the  first  place,  the  government  actually 
coins  the  money  or  requires  it, to  be  coined  according  to  its 
own  rules,  whereas  in  other  cases  it  only  defines  the  units 
of  measurement  and  commands  conformity  to  its  definitions. 
In  the  second  place,  coins  are  standardized  not  only  as  to 
quantity  but  as  to  quality  as  well.  There  is  no  probability 
that  any  government  will  be  called  upon  to  do  that  which 
would  be  analogous  to  coining  money,  —  actually  put  up  other 
commodities  in  standardized  packages.  Something  is  to  be 
said  in  favor  of  fixing  standards  of  quality  as  well  as  standards 
of  quantity. 

Need  for  standards  for  determining  quality.  The  reasons 
for  fixing  standards  of  quality,  wherever  it  can  be  done, 
are  identical  with  those  for  fixing  standards  of  measuring 
quantity.  They  are  all  summed  up  in  the  superior  economy 
of  buying  on  grade  and  reputation  as  compared  with  buying  on 
inspection.  The  buyer  of  an  unstandardized  commodity  may 
have  enough  confidence  in  the  seller's  system  of  weights  and 
measures  to  avoid  the  necessity  of  weighing  and  measuring  for 
himself,  but  he  can  scarcely  avoid  the  necessity  of  inspecting 
the  commodity  in  order  to  determine  its  quality.  In  some 
cases  the  determination  of  its  quality  is  easier  than  that  of  its 
quantity,  but  in  other  cases  it  is  not.  In  all  cases  where  quality 
can  be  standardized,  there  is  economy  of  effort.  So  far  as 
buyers  can  be  saved  the  trouble  of  inspection,  so  far  will  they 
be  enabled  to  economize  the  time  and  effort  involved  in  making 


324          PRINCIPLES  OF  POLITICAL  ECONOMY 

purchases,  and  so  far  also  will  the  salability  of  commodities  be 
increased.  Whether  this  will  reduce  the  cost  of  getting  the 
standardized  commodities  from  producers  to  consumers,  or 
merely  enable  the  consumers  to  use  their  time  more  advan- 
tageously to  themselves,  may  be  open  to  question  ;  but  the 
ultimate  economic  effects  are  much  the  same  in  either  case. 

Need  of  expertness  in  buying  supplies.  Not  the  least  among 
the  advantages  of  a  minute  division  of  labor  is  the  fact  that 
each  individual  can  avoid  the  necessity  of  being  expert  in  many 
things,  and  therefore  has  time  to  become  a  specialist  in  one 
thing.  One  of  the  advantages  of  the  standardization  of  com- 
modities is  that  the  average  consumer  can  avoid  the  necessity 
of  being  an  expert  judge  of  the  many  articles  which  he  has  to 
purchase.  He  may  therefore  utilize  his  time  and  mental  energy 
in  his  own  special  field  of  work.  There  is,  to  be  sure,  some- 
thing attractive  in  the  custom  of  the  well-to-do  burgher  going  to 
market  and  selecting  with  the  eye  of  a  connoisseur  the  various 
articles  needed  by  his  household,  but  it  is  wasteful  of  time  and 
mental  energy.  When  he  or  his  housekeeper  is  able  to  order 
by  telephone,  without  any  inspection  whatever,  and  still  get 
what  he  wants,  more  time  is  left  for  other  things. 

This  will  help  to  explain  two  very  distinct  tendencies  in 
present-day  retail-marketing  methods.  The  first  is  to  put  up  more 
and  more  articles  in  standardized  packages.  The  second  is 
to  place  more  and  more  dependence  upon  the  retailer,  who,  in 
many  cases,  is  coming  to  regard  his  customers  as  clients,  to  whom 
he  is  bound  to  give  his  own  expert  service.  Both  tendencies 
are  designed  to  save  the  consumer  the  trouble  of  becoming  an 
expert  buyer  and  to  leave  him  more  time  for  other  things. 
Neither  tendency  has  as  yet  reduced  the  cost  of  getting  prod- 
ucts from  producer  to  consumer.  If  the  consumer  utilizes  the 
time  saved  in  marketing  by  doing  work  which  earns  him  a  larger 
income  with  which  to  purchase  goods,  it  perhaps  does  him  as 
much  good  as  it  would  if  these  tendencies  merely  reduced  the 
price  of  commodities. 


MARKETING  325 

Marketing  by  telephone  an  American  habit.  Marketing  by 
telephone  is  peculiarly  an  American  habit.  This  may  in  part 
explain,  and  in  part  be  explained  by,  the  fact  that  two  thirds  of 
all  the  telephones  in  the  world  are  in  the  United  States  and 
three  fourths  of  them  are  in  the  United  States  and  Canada. 
This  habit  makes  it  more  and  more  difficult  for  the  householder 
to  inspect  her  purchases.  She  is  therefore  more  and  more 
driven  to  one  of  the  alternatives  mentioned  above.  She  must 
order  well-known  brands,  which  are  put  up  in  standardized 
packages,  trade-marked,  and  sold  on  grade  or  reputation,  or  else 
she  must  rely  on  her  grocer  or  her  marketman  very  much  as 
she  does  on  her  physician,  her  lawyer,  or  her  financial  adviser. 
The  quality  of  dependableness  becomes,  therefore,  more  and 
more  important  in  the  grocer  and  the  marketman.  Such 
qualities  have  to  be  paid  for.  Thus  the  householder  saves 
time,  but  pays  for  the  privilege. 

If  she  buys  standardized  goods  in  standardized  packages, 
she  will  usually  pay  from  50  to  100  per  cent  more  than  she 
would  if  she  bought  in  bulk  and  did  her  own  inspecting  and 
selecting.  If  she  relies,  as  a  client,  upon  the  honesty  and  ex- 
pertness  of  her  grocer  and  her  marketman,  she  must  pay  for 
that.  Honest  and  capable  experts  do  not  have  to  live  on  small 
incomes  anywhere ;  and  when  they  go  into  the  business  of 
selling  produce,  they  will  charge  for  their  services. 

Standardization  should  take  place  early  in  the  marketing 
process.  One  reason  why  these  tendencies  merely  save  the 
time  of  the  consumer,  instead  of  reducing  the  cost  of  getting 
the  products  to  him,  is  that  the  standardization  takes  place  only 
in  the  last  stage  of  the  process  ;  that  is,  just  before  the  com- 
modities reach  the  consumer.  In  order  to  reduce  materially 
the  spread  between  the  price  which  the  producer  gets  and  that 
which  the  consumer  pays,  standardization  must  take  place  early 
in  the  process.  This  will  enable  the  standardized  article  to  go 
through  the  channels  of  trade  at  a  lower  cost.  If  it  has  to  be 
inspected  every  time  it  changes  hands,  the  process  is  expensive, 


326          PRINCIPLES  OF  POLITICAL  ECONOMY 

and  someone  must  pay  the  cost.  Some  products  apparently 
cannot  be  standardized,  so  there  must  always  be  a  wide  spread 
between  the  producers'  and  the  consumers'  prices. 

A  good  illustration  of  the  effect  of  standardizing  a  product 
early  in  the  process  of  getting  it  from  the  producer  to  the  con- 
sumer is  found  in  the  marketing  of  certain  kinds  of  Western 
fruit.  They  are  graded  and  standardized  as  soon  as  they  leave 
the  orchards.  All  subsequent  inspection  is  therefore  unneces- 
sary, and  the  cost  of  getting  them  to  the  consumer  is  reduced 
practically  to  the  physical  cost  of  haulage  and  handling.  This 
has  notably  reduced  the  spread  between  the  two  prices.  Many 
other  commodities,  such  as  wheat,  cotton,  pig  iron,  and  coal,  are 
sold  largely  on  grade  rather  than  on  inspection.  In  these  cases 
the  government  has  had  very  little  to  do  with  the  standardiza- 
tion. Two  recent  acts  of  Congress,  however,  have  brought  the 
government  definitely  into  this  field  as  the  fixer  of  standards 
of  quality.  These  are  the  Cotton  Futures  Act  and  the  Grain 
Standards  Act.  Both  give  the  Secretary  of  Agriculture  power 
to  establish  grades  and  to  enforce  their  use  in  the  regular  chan- 
nels of  trade.  A  number  of  states  also  have  passed  grading 
laws  of  various  kinds.  Four  New  England  states  have  passed 
a  uniform  apple-grading  law,  defining  the  contents  of  a  stand- 
ard barrel,  describing  the  various  grades  of  apples,  and  impos- 
ing penalties  upon  all  departures  from  the  standard  prescribed. 

Such  legislative  acts  cannot  be  called  in  any  true  sense  inter- 
ferences with  trade.  They  are  designed  to  increase  the  freedom 
with  which  commodities  may  circulate.  They  are  somewhat 
analogous  to  the  work  of  the  traffic  policeman  on  a  crowded 
corner.  He  may  exercise  authority  and  interfere  occasionally 
with  an  individual's  movements,  but  the  result  of  his  so-called 
interference  is  greater  freedom  of  traffic.1 

Brands  and  trade-marks.  Brands,  trade-marks,  and  other 
selling  devices  of  this  general  description  would  be  useless  or 

1  Compare  the  article  by  the  author,  on  "  Standardization  in  Marketing,"  in 
The  Quarterly  Journal  of  Economics,  Vol.  XXXI,  No.  2,  pp.  341-344. 


MARKETING  327 

impossible  without  some  kind  of  standardization  in  production 
or  grading  of  products.  Where  these  services  are  properly 
used,  they  are  an  aid  to  the  buyer  as  well  as  to  the  seller. 
They  help  him  to  know  what  he  is  getting  and  enable  even 
the  inexpert  buyer  to  buy  safely. 

Advertising  and  salesmanship.  From  the  point  of  view  of 
the  seller  of  any  commodity  there  is  not  much  doubt  as  to  the 
efficacy  of  advertising  and  expert  salesmanship.  Serious  doubts 
have  been  expressed,  however,  as  to  the  social  advantage  of 
what  may  be  called  high-pressure  selling.  Why,  we  are  asked, 
should  we  be  subjected  to  all  the  arts  of  the  expert  salesman 
and  advertiser,  who  are  doing  their  utmost  to  persuade  us  to 
spend  our  money  for  things  which  we  do  not  need  ?  On  the 
other  hand,  it  is  replied,  why  should  not  every  art  of  persua- 
sion known  to  the  expert  be  brought  to  bear  upon  men  to  lead 
them  to  do  what  they  ought  to  do  ?  This  is  what  evangelism, 
moral  leadership,  and  all  sound  instruction  amounts  to.  If  we 
are  to  allow  freedom  in  the  exercise  of  the  arts  of  persuasion 
at  all,  it  will  be  difficult  to  draw  the  line.  Who  shall  act  as  our 
censor  and  permit  one  man  and  forbid  another  to  persuade 
people  to  do  what  he  wants  them  to  do  ? 

Except  in  extreme  cases  this  argument  is  unanswerable.  In 
the  case  of  immoral  acts,  or  any  act  which  the  moral  sense  of 
the  community  condemns,  it  is  obviously  as  immoral  to  per- 
suade people  to  commit  those  acts  as  it  is  to  commit  them. 
If  there  is  anything  which  men  clearly  ought  not  to  buy,  it  is 
equally  clear  that  men  ought  not  to  advertise  it  or  try  to  sell 
it.  But  the  difficulty,  except  in  extreme  cases,  is  to  decide 
just  what  things  it  is  proper,  and  what  it  is  improper,  to  buy. 

It  is  quite  clear,  however,  aside  from  all  questions  of  legal 
conduct,  that  much  of  our  advertising  is  a  waste  of  human 
energy.  Sometimes  it  is  a  service  to  a  consumer  to  apprise 
him  of  the  fact  that  he  can  buy  something  which  he  has  long 
wanted,  and  to  tell  him  where  it  can  be  had.  In  most  cases, 
however,  advertising  serves  no  such  purpose.  One  does  not 


328          PRINCIPLES  OF  POLITICAL  ECONOMY 

need  an  advertisement  to  apprise  him  of  the  fact  that  soap  can 
be  purchased.  The  only  purpose  served,  in  all  such  cases,  is 
to  persuade  people  to  buy  one  brand  rather  than  another.  Our 
helplessness  in  such  a  situation  is  revealed  to  us  when  we  con- 
sider that  it  would  take  a  great  deal  of  campaigning,  accom- 
panied by  advertising  and  high-pressure  persuasion,  to  work  up 
a  public  sentiment  hostile  to  advertising.  We  might  easily  waste 
more  energy  in  this  campaign  than  is  now  wasted  in  advertising. 

Political  campaigning.  Socialists  are  in  the  habit  of  pointing 
to  the  wastefulness  of  advertising  as  one  of  the  costs  of  com- 
petition. They  do  not  point  out,  however,  that  a  political  cam- 
paign is  just  as  wasteful  as  a  selling  campaign.  The  candidate 
for  office  advertises  his  candidacy  and  uses  high-pressure  per- 
suasion to  get  people  to  vote  for  him.  Since  the  extension  of 
government  power  and  authority  would  multiply  government 
offices,  it  would  necessarily  multiply  the  number  of  campaigners 
and  greatly  increase  the  waste  of  time  and  energy  used  up  in 
political  campaigns.  Every  campaigner,  even  he  who  is  cam- 
paigning for  socialism,  is  doing  much  the  same  kind  of  work 
as  is  done  by  the  expert  advertiser.  He  is  using  high-pressure 
persuasion  to  get  men  to  do  things  which  they  would  other- 
wise not  do. 

It  looks  as  though  we  should  have  to  regard  persuasion  in  all 
its  aspects,  except  persuasion  to  do  that  which  is  morally  con- 
demned, as  a  necessary  cost  of  freedom.  A  despot  could  sup- 
press all  persuasion,  in  politics  as  well  as  in  salesmanship,  but 
a  free  people  can  scarcely  get  along  without  it.  Freedom  is  in 
some  respects  costly,  but  it  is  worth  all  it  costs. 


CHAPTER  XXVII 

ECONOMIC  CRISES 

Financial  crises.  One  of  the  most  important  and  most 
puzzling  of  all  modern  economic  questions  is  that  of  the  fre- 
quent recurrence  of  financial  crises  and  general  industrial  de- 
pressions. A  financial  crisis  is  an  occasion  when  the  money 
market  becomes  suddenly  demoralized,  confidence  disappears, 
and  credit  shrinks.  Everyone  to  whom  money  is  owed  wants 
it  at  once,  but  no  one  wants  to  let  go  of  any  money  in  his 
possession,  for  fear  that  he  may  not  be  able  to  get  any  more. 
Besides,  there  does  not  seem  to  be  money  enough  to  pay  off 
existing  debts. 

In  the  chapter  on  Banking  it  was  pointed  out  that  a  large 
part  of  the  business  of  the  world  was  done  on  credit,  without 
the  actual  handling  of  money.  If  you  will  imagine  a  group  of 
men  doing  business  with  one  another,  where  each  one  trusts 
every  other,  you  will  see  that  a  large  amount  of  business  can  be 
done  with  a  ridiculously  small  amount  of  money.  Many  trans- 
actions will  be  carried  on  by  means  of  promises  to  pay  money 
instead  of  with  the  money  itself.  Many  of  these  promises  will 
be  balanced  against  one  another  and  canceled  without  the  use 
of  any  money.  In  other  cases  the  money  will  be  used  merely 
to  pay  the  balances.  But  if  something  should  happen  to  destroy 
confidence,  so  that  no  one  would  accept  promises,  but  everyone 
demanded  real  money,  there  might  not  be  money  enough  to 
go  around  and  make  the  necessary  payments.  In  that  case 
business  would  have  to  slow  down,  and  only  as  much  business 
could  be  done  as  could  be  done  with  the  small  amount  of 
money  available.  If,  in  addition  to  this,  everyone  held  on  to 
all  the  money  he  could  lay  hands  on,  for  fear  that  he  might 

329 


330          PRINCIPLES  OF  POLITICAL  ECONOMY 

not  be  able  to  get  any  more,  even  the  limited  amount  of 
money  in  circulation  would  move  slowly,  and  business  would 
have  to  slow  down  correspondingly.  A  swift  dollar  may  pass 
from  hand  to  hand  many  times  in  a  day,  and  in  this  case 
it  will  do  a  large  amount  of  business ;  but  a  slow  dollar 
passes  from  hand  to  hand  only  a  few  times  a  day,  and  does 
a  small  amount  of  business. 

Industrial  depressions.  An  industrial  depression  is  usually 
more  deep-seated  than  a  financial  crisis  and  usually  lasts  for  a 
longer  time.  It  is  a  general  stagnation  of  production  because 
of  an  inability  to  get  satisfactory  prices  for  products.  Various 
explanations,  some  intelligent  and  some  absurd,  have  been 
offered.  Overproduction  is  one  of  the  most  common  and  least 
intelligent.  There  may  be  such  a  thing  as  disproportionate 
production,  but  such  a  thing  as  general  overproduction  is  a 
physical  impossibility.  The  production  and  supplying  of  one 
thing  is  a  demand  for  something  else ;  the  more  production, 
the  more  demand  ;  but  if  some  things  are  produced  and  offered 
for  sale,  and  there  is  no  demand  for  them,  it  means  either 
that  those  few  things  are  overproduced  or  that  the  other  things 
which  might  be  exchanged  for  them  are  underproduced. 

The  overproduction  theory.  One  phase  of  the  overproduc- 
tion theory  of  industrial  depression  is  that  wages  are  so  low 
that  the  laborer  is  not  able  to  buy  his  own  products.  It  is 
argued  that  this  results  in  an  overproduction  and  glut  on  the 
market.  There  are  many  excellent  reasons  why  wages  should 
be  higher  than  they  are,  but  this  is  not  one  of  them.  So  far 
as  its  effect  on  the  general  purchasing  power  of  the  community 
is  concerned,  it  makes  no  difference  whether  wages  are  high 
and  rents,  interests,  and  profits  are  low,  or  whether  wages  are 
low  and  rents,  interests,  and  profits  are  high.  If  the  laborer 
gets  a  small  share  of  the  production  of  a  given  industry,  and 
the  managers,  landowners,  and  capitalists  get  a  large  share, 
these  have  a  large  purchasing  power  and  the  laborer  a  small 
purchasing  power.  The  value  of  the  whole  product  of  every 


ECONOMIC  CRISES 


331 


industry  goes  to  these  various  classes,  and  they  have  it  all  to 
spend.  If  one  class  possesses  a  large  share,  and  another  class 
a  small  share,  the  total  amount  to  be  spent  for  other  commodi- 
ties is  not  affected  by  that  distribution.  If  the  laborers  get 
absolutely  the  whole  product  of  an  industry,  there  would  be  no 
more  to  spend  on  other  products  than  if  the  laborers  got  one 
half  the  product  and  the  other  participants  got  the  other  half. 
This,  let  it  be  repeated,  has  nothing  to  do  with  other  and 
excellent  reasons  why  wages  should  be  high. 

The  periodicity  theory.  A  certain  periodicity  has  been 
observed  in  the  recurrence  of  crises  and  depressions.  It  is  not 
always  easy  to  determine  just  the  interval  that  elapses  between 
depressions.  Sometimes  they  come  approximately  twenty  years 
apart,  but  they  have  a  disconcerting  habit  of  coming  at  unex- 
pected times.  In  his  book  on  "  Economic  Crises  "  Jones  gives 
the  following  table  : 1 

LIST  OF  ECONOMIC  CRISES 


UNITED 
STATES 

ENGLAND 

FRANCE 

UNITED 
STATES 

ENGLAND 

FRANCE 

— 

1792-93 

— 

1847 

1847 

1847 

— 

1796 

— 

— 

— 

I855 

— 

— 

1804 

I8S7 

1857 

I8S7 

— 

1810-11 

— 

— 

1866 

— 

1812 

— 

— 

1869 

— 

— 

— 

— 

1813 

1873 

1873 

1873 

— 

1815 

— 

— 

— 

1882 

1818 

— 

1818 

1884 

— 

1884-5 

1825 

1825 

1825 

1890 

1890 

1890 

— 

— 

1830 

1893 

— 

1893 

1  837-39 

1836-39 

1836-39 

In  the  nineteenth  century  it  will  be  noticed  that  there  were 
severe  crises  in  1818,  1837,  1857,  with  lesser  crises  in  1825  and 
1847.  The  severe  crises  seemed  to  come  every  twenty  years 


1  Edward  D.  Jones,    Economic   Crises.    The   Macmillan   Company,  New 
York,  1900. 


332          PRINCIPLES  OF  POLITICAL  ECONOMY 

for  almost  half  a  century.  Again  there  were  severe  crises  in 
1873  and  1893,  with  a  less  severe  one  in  1884.  Another  one 
occurred  in  1907. 

Various  attempts  have  been  made  to  explain  this  apparent 
periodicity.  The  late  William  Stanley  Jevons  developed  an 
interesting  theory  of  the  coordination  between  sun-spot  cycles 
and  industrial  depressions.  The  sun-spot  cycles,  he  argued, 
had  a  profound  effect  on  the  weather,  rainfall,  etc.,  and  these 
in  turn  affected  the  agricultural  basis  of  the  world's  wealth. 
This  theory,  however,  had  not  been  taken  seriously  by  the 
economists  until  it  was  recently  revived  by  the  interesting 
observations  of  Professor  Ellsworth  Huntington.  It  is  true 
he  has  not  developed  the  theory  at  great  length  as  applied  to 
economic  crises,  but  he  has  presented  strong  evidence  in  favor 
of  the  doctrine  that  solar  disturbances  profoundly  affect  climatic 
conditions  and  rainfall,  and  these  in  turn  have  produced  great 
historical  and  economic  disturbances.1 

The  overspeculation  theory.  There  is  a  persistent  belief 
among  all  students  of  the  question  that  overspeculation  has 
something  to  do  with  depressions.  When  a  fever  of  specula- 
tion takes  possession  of  a  community,  the  prices  paid  for  the 
articles  in  which  people  are  speculating  do  not  bear  any  logical 
relation  to  the  real  values.  The  speculator  will  pay  any  price 
for  anything,  provided  he  thinks  he  can  sell  it  later  at  a  still 
higher  price.  When  prices  are  tending  rapidly  upward,  he  may 
rely  on  the  mere  momentum  to  carry  them  higher.  There  is 
only  one  possible  outcome  of  this  tendency  ;  that  is,  a  rapid  fall 
in  the  prices  of  the  commodities  in  which  men  are  speculating. 

Even  though  the  speculation  takes  place  in  a  single  article, 
it  may  produce  a  profound  economic  disturbance.  The  money 
that  is  absorbed  in  the  speculative  purchasing  of  the  article  in 
question  is  necessarily  withdrawn  from  other  kinds  of  business. 

1  Ellsworth  Huntington,  "  Climatic  Changes  and  Agricultural  Exhaustion 
as  Elements  in  the  Fall  of  Rome,"  Quarterly  Journal  of  Economics,  February, 
1917.  See  also  "The  Pulse  of  Asia,"  Houghton  Mifflin  Company,  Boston,  1907. 


ECONOMIC  CRISES  333 

This  in  itself  produces  some  disturbance.  When  a  fall  in 
prices  begins,  a  general  bankruptcy  among  the  speculators  takes 
place.  When  a  number  of  men  become  bankrupt  and  are 
unable  to  pay  their  obligations,  a  process  begins  which  may  be 
compared  to  knocking  over  one  brick  in  a  row  of  bricks  stand- 
ing close  together.  The  falling  of  one  brick  knocks  over  the 
one  next  to  it,  and  so  on  until  the  whole  row  falls.  Accordingly, 
if  one  individual  who  owes  money  to  another  fails  to  pay  his 
debt,  the  latter,  not  being  able  to  collect  his  money,  fails  to  pay 
his  obligations  to  a  third,  and  so  on  ;  one  after  another  fails, 
and  the  bankruptcy  spreads  throughout  the  community  in  a 
sort  of  wave  motion.  A  depression  always  follows  speculation 
of  any  kind,  whether  it  be  a  real-estate  boom  or  a  boom  in 
short-horn  cattle,  or  Belgian  hares,  or  French  bulldogs.  This 
has  led  to  the  sage  remark  that  "  the  echo  of  a  departed 
boom  is  the  saddest  sound  in  nature." 

The  real-estate  boom.  The  wave  of  speculation  in  land 
which  is  known  as  a  real-estate  boom  is  one  of  the  most  inter- 
esting and  instructive  of  all  subjects  of  economic  study.  No 
one  has  ever  been  able  to  explain  just  how  it  starts  ;  but  after 
it  has  started,  it  is  not  so  difficult  to  understand.  Something 
happens,  let  us  say,  to  produce  a  very  rapid  rise  in  the  price 
of  city  lots.  Men  double  and  quadruple  their  money  in  a  short 
time  by  merely  buying  and  selling  again  at  a  higher  price. 
This  sets  them  and  others  crazy.  Everyone  wants  to  buy  lots 
for  the  purpose  of  selling  again.  The  first  effect  of  this  is  to 
greatly  increase  the  number  of  buyers,  and  the  effect  of  this  is 
to  send  the  prices  still  higher.  These  buyers,  as  a  consequence, 
also  make  money  rapidly.  This  attracts  still  other  buyers,  some 
of  them  coming  from  long  distances  to  share  in  the  harvest. 
So  long  as  buyers  are  increasing  faster  than  sellers,  prices  con- 
tinue to  go  up  ;  but  when  the  buyers  become  less  numerous  than 
the  sellers,  which  must  inevitably  happen,  prices  begin  to  fall. 
Suddenly  everyone  becomes  a  seller  and  there  are  no  buyers  at 
all.  Stagnation,  depression,  bankruptcy,  and  general  ruin  ensue. 


334          PRINCIPLES  OF  POLITICAL  ECONOMY 

The  recovery  is  very  slow.  The  men  who  are  left  with  land 
on  their  hands  are  not  fitted  to  use  it.  They  did  not  want  it 
for  use ;  they  only  wanted  it  to  sell.  This  means  an  inefficient 
use  of  the  land.  Besides,  even  those  owners  who  are  fitted  to 
put  the  land  to  an  economic  use  are  handicapped  because  they 
put  too  much  money  into  the  land  and  have  too  little  with 
which  to  develop  or  use  it.  Those  who  were  lucky  enough  to 
sell  out  in  good  time  are  very  careful  not  to  let  go  of  their 
money  or  to  invest  it  in  productive  industry.  Years  usually 
elapse  before  the  city  recovers  from  the  disaster. 

Speculation  in  farm  land,  in  railroads,  in  mining,  as  well  as 
in  Belgian  hares,  tulips,  and  short-horn  cattle,  has  produced 
a  number  of  historic  depressions  of  this  kind. 

The  overinvestment  theory.  There  are,  however,  even  more 
fundamental  and  far-reaching  reasons  than  these  for  a  certain 
tendency  to  overinvestment  in  certain  special  lines  of  industry. 
Overinvestment  may  produce  very  much  the  same  results  as 
overspeculation,  though  they  are  not  likely  to  be  so  acute  or 
so  sudden  in  their  appearance. 

Overinvestment  in  the  railroads  of  the  Far  West  is  supposed 
to  have  had  something  to  do  with  the  panic  of  1857.  The  rail- 
roads were  built,  the  capital  was  sunk,  and  then  it  began .  to 
appear  that  it  would  be  some  years  before  there  would  be  busi- 
ness enough  to  put  the  railroads  on  a  paying  basis.  Meanwhile 
all  that  capital  had  been  diverted  from  other  industries,  which 
suffered  in  consequence.  In  many  cases,  however,  the  shares  of 
the  new  railroad  enterprise  had  been  bought  on  credit.  As  soon 
as  it  appeared  that  dividends  were  ijot  to  be  speedily  forth- 
coming, the  value  of  the  shares  fell  rapidly,  and  those  who 
had  invested  on  credit  in  many  cases  suffered  bankruptcy. 

There  is  something  also  in  the  very  nature  of  modern  indus- 
try which  seems  to  render  it  highly  sensitive.  The  countries 
which  show  the  largest  amount  of  enterprise  and  the  adventur- 
ing spirit  not  only  expand  most  rapidly  but  also,  at  the  same 
time,  seem  to  have  the  largest  number  of  industrial  depressions. 


ECONOMIC  CRISES  335 

The  tendency  to  rush  headlong  into  new  enterprises  is  doubt- 
less an  important  factor  in  national  expansion,  but  it  also  pro- 
duces a  severe  reaction  when  this  headlong  spirit  rushes  too 
far  in  a  given  direction. 

The  following  is  from  an  article  by  the  author : 1 

One  characteristic  of  a  modern  industrial  community  is  the  proportion 
which  producers'  goods  hold  to  the  total  wealth.  This  means  that  a  large 
part  of  the  wealth  is  in  forms  which  have  no  utility  in  themselves,  but 
which  derive  their  utility  from  the  goods  which  they  help  to  produce.  A 
satisfactory  explanation  of  industrial  depression  must,  in  the  opinion  of  the 
present  writer,  be  sought  in  the  laws  of  value  which  govern  investment  in 
this  class  of  goods,  rather  than  in  the  examination  of  the  conditions  of  the 
money  market,  or  conditions  of  organized  credit. 


VIOLENT  FLUCTUATIONS  OF  THE  VALUE  OF  PRODUCERS' 
GOODS  ON  THE  INVESTORS'  MARKET 

Let  us  begin  by  noticing  a  few  elementary  facts.  Every  farmer  knows 
that  a  horse  which  will  not  earn  more  than  his  feed,  or  a  piece  of  land  which 
will  not  produce  more  than  it  costs  to  cultivate  it,  is  of  no  value.  Likewise 
every  business  man  knows  that  an  establishment  that  cannot  be  made  to 
pay  more  than  running  expenses  is  worth  nothing  except  as  old  iron.  This 
is  equivalent  to  saying  that  the  value  of  such  an  establishment  —  or  indeed 
of  any  productive  agent  —  is  determined  not  by  the  total  value  of  its 
product,  but  by  the  excess  of  that  total  value  over  and  above  the  run- 
ning expenses.  When  the  running  expenses  are  high  and  the  output  large, 
so  that  the  earnings  depend  upon  small  profits  and  large  sales,  a  very 
slight  rise  in  the  value  of  the  product  may  double  or  more  than  double  the 
value  of  the  establishment,  provided,  of  course,  that  the  rise  in  value  is 
believed  to  be  permanent.  Let  us  suppose  that  a  certain  shoe  factory  can 
be  made  to  turn  out  100,000  pairs  of  shoes  in  a  year  at  a  uniform  cost  of 
$2  a  pair.  If  these  shoes  cannot  be  sold  at  more  than  $2  a  pair,  the  plant 
is  worthless;  but  if  they  can  be  sold  at  $2.25  a  pair,  the  earnings  of  the 
plant  will  be  $25,000,  which,  capitalized  at  5  per  cent,  will  make  it  worth 
$500,000.  If,  however,  the  price  of  shoes  should  rise  to  $2.50,  the  earn- 
ings of  the  plant  would  be  double ;  and  if  this  rise  in  value  were  believed 
to  be  permanent,  the  value  of  the  plant  would  double.  Thus  an  increase 
of  only  one  ninth  in  the  value  of  the  product  would  double  the  value  of 

1  "  A  Suggestion  fora  Theory  of  Industrial  Depressions,"  Quarterly  Journal 
of  Economics,  May,  1903,  p.  497. 


336          PRINCIPLES  OF  POLITICAL  ECONOMY 

the  plant.  In  the  same  way,  a  subsequent  fall  of  one  tenth  in  the  value  of 
the  product  would  reduce  the  value  of  the  plant  by  one  half,  while  a  fall 
of  one  fifth  in  the  value  of  the  product  would  destroy  the  value  of  the 
plant  altogether.  This  may  be  stated  as  a  general  law  to  the  effect  that 
a  slight  fluctuation  in  the  value  of  a  product  tends  to  produce  a  violent 
fluctuation  in  the  value  of  the  establishment  producing  it.  Stated  in  still 
more  general  terms,  the  value  of  producers'  goods  tends  to  fluctuate  more 
violently  than  the  value  of  consumers'  goods. 

This  law  is  capable  of  still  further  extension  when  we  consider  that  pro- 
ducers' goods  are  themselves  produced  by  other  productive  agents.  The 
different  parts  of  the  shoe  factory  of  the  above  illustration  were  produced 
in  other  factories,  and  the  fluctuations  in  the  value  of  the  shoe  factory  would 
tend  to  produce  still  more  violent  fluctuations  in  the  value  of  the  establish- 
ments producing  the  different  parts,  for  the  same  reasons  as  were  given 
above.  The  law  might  therefore  be  extended  so  as  to  read,  The  farther 
removed  the  producers'  goods  are  from  some  consumable  product,  and  the 
more  remotely  their  value  is  derived  from  that  of  some  consumable  product, 
the  more  violent  the  fluctuations  in  value  tend  to  be. 

This  would  be  the  tendency  until  that  stage  was  reached  where  the  pro- 
ducers' agents  were  no  longer  especially  connected  with  one  particular  line 
of  production,  and  were  not  therefore  affected  merely  by  changes  in  price 
of  the  one  kind  of  consumable  product. 

It  must  be  admitted  that  the  fluctuations  in  the  value  of  producers' 
goods  were  never  actually  so  violent  as  the  foregoing  illustrations  have 
supposed,  mainly  for  the  reason  that  not  every  rise  or  fall  in  the  value  of 
products  is  believed  to  be  permanent.  But  where  the  high  or  low  price  of 
a  product  continues  for  some  time,  it  invariably  leads  to  a  belief  that  it  is 
likely  to  continue ;  and  this  raises  or  depresses  the  price  of  the  productive 
agent  out  of  proportion  to  the  rise  or  fall  in  the  price  of  the  product. 

In  this  connection  it  is  well  to  observe  that  while  the  immediate  demand 
for  consumers'  goods  comes  from  consumers  themselves,  the  immediate 
demand  for  producers'  goods  comes  from  investors.  Since  their  willingness 
to  invest  depends,  not  upon  the  value  of  the  gross  product  of  the  productive 
agent,  but  upon  the  excess  of  that  gross  product  over  and  above  the  cost  of 
using  the  agent,  —  which  excess  has  been  shown  to  fluctuate  more  violently 
than  the  total  value,  —  the  instability  of  the  investors'  market  is  therefore 
not  altogether  due  to  psychological  changes  on  their  part,  but  in  a  large 
degree  to  the  objective  causes  which  affect  the  value  of  the  things  in  which 
they  invest. 

A  slight  rise  in  the  price  of  consumers'  goods  will  so  increase  the  value 
of  the  producers'  goods  which  enter  into  their  production  as  to  lead  to  larger 
investment  in  producers'  goods.  The  resulting  large  market  for  producers' 


ECONOMIC  CRISES  337 

goods  again  stimulates  the  production  of  such  goods  and  withdraws  pro- 
ductive energy  from  the  creation  of  consumers'  goods.  This  for  the  time 
tends  to  raise  the  price  of  consumers'  goods  still  higher,  and  this  again  to 
stimulate  still  further  the  creation  of  producers'  goods.  There  is  no  check 
to  this  tendency  until  the  new  stocks  of  producers'  goods  begin  to  pour  upon 
the  market  an  increased  flow  of  consumers'  goods.  This  tends  to  produce 
a  fall  in  their  value,  which  in  turn  produces  a  still  greater  fall  in  the  value 
of  producers'  goods ;  and  so  the  process  goes.  There  seems,  therefore,  to 
be  a  fundamental  reason  for  the  periodicity  of  industrial  depression,  which 
can  only  be  removed  by  such  a  complete  knowledge  and  understanding  of 
the  situation  as  would  enable  the  business  world  to  foresee  the  tendencies 
and  take  measures  to  overcome  them. 

These  observations  regarding  the  law  of  value  as  applied  to  different 
classes  of  goods  may  throw  some  light  on  the  relative  stability  in  the  price 
of  a  consumable  article,  such  as  sugar,  in  comparison  with  the  price  of  such 
an  article  as  steel,  which  belongs  to  the  class  of  producers'  goods  several 
steps  removed  from  consumers'  goods.  The  market  for  sugar  is  mainly  a 
consumer's  market,  while  the  market  for  steel  is  mainly  an  investor's  market. 
A  consumer's  market  depends  upon  the  willingness  of  the  public  to  consume, 
while  an  investor's  market  depends  upon  their  willingness  to  invest.  As  was 
shown  above,  there  are  reasons,  other  than  psychological,  why  an  investor's 
market  must  be  more  unstable  than  a  consumer's  market. 


CHAPTER  XXVIII 
FREE  TRADE 

Advantages  of  exchange  among  individuals  of  the  same 
country.  Freedom  of  exchange  between  individuals  is  so 
clearly  advantageous  that  practically  no  one  advocates  serious 
restrictions  upon  it.  Freedom  of  trade  between  different  sec- 
tions of  the  same  country  also  is  generally  approved.  It  would 
seem  absurd  for  the  South,  which  is  peculiarly  adapted  to  cot- 
ton, to  try  to  be  entirely  self-supporting,  and  especially  to  pro- 
duce certain  things,  such  as  wheat,  for  which  its  soil  and 
climate  are  not  so  well  suited  as  are  those  of  other  sections  of 
the  country.  No  one  would  seriously  advocate  an  interference 
with  the  shipments  of  wheat  and  wheat  flour  to  the  South  or 
of  cotton  to  the  North. 

Advantages  of  exchange  among  individuals  of  different  coun- 
tries. It  is  argued  by  a  large  majority  of  the  students  of  econom- 
ics that  the  same  arguments  which  favor  a  policy  of  freedom 
of  exchange  within  the  country  are  equally  in  favor  of  freedom 
of  exchange  between  different  countries.  The  lines  which 
separate  one  country  from  another  are  frequently  arbitrary 
political  boundaries  and  do  not  necessarily  interfere  with  the 
channels  of  advantageous  commerce.  These  students  would 
hold  that  there  is  no  more  reason  why  there  should  be  an 
interference  with  freedom  of  trade  across  the  St.  Lawrence 
and  the  Great  Lakes  than  across  the  Ohio  River  or  the  Mis- 
sissippi. If  there  are  individuals  in  Canada  who  desire  products 
from  the  United  States,  and  individuals  in  the  United  States 
who  desire  products  from  Canada,  there  is  no  more  reason 
why  they  should  be  forbidden  to  make  the  exchange  than  there 
is  why  two  citizens  from  different  states  of  the  United  States 
should  be  forbidden  to  exchange  their  products. 

338 


FREE  TRADE  339 

The  diversion  of  labor  and  capital  from  the  more  pro- 
ductive into  the  less  productive  industries.  The  positive  argu- 
ment in  favor  of  freedom  of  trade  rests  upon  one  or  two 
fundamental  propositions.  One  of  these  is  that  the  labor  and 
capital  of  any  region  tends  of  itself  to  seek  those  opportunities 
and  to  develop  those  industries  which  are  most  profitable  to 
themselves.  From  this  it  would  follow  that  any  interference 
with  this  process,  or  any  attempt  to  develop  an  industry  in  a 
region  where  it  would  not  develop  without  special  favors,  must 
necessarily  be  a  mistake.  It  would  merely  divert  labor  and 
capital  from  the  more  productive  to  the  less  productive  indus- 
try. Left  to  itself,  labor  and  capital  in  the  southern  part  of 
the  United  States  will  go  into  the  growing  of  cotton  without 
any  governmental  encouragement.  This  is  a  sign  that  cotton- 
growing  is  one  of  the  most  productive  opportunities  of  that 
region.  Any  attempt  to  tax  cotton-growing,  and  out  of  the  pro- 
ceeds to  pay  a  bounty  to  some  other  industry,  would  merely 
mean  that  a  certain  amount  of  the  labor  and  capital  of  the 
South  would  be  diverted  from  the  cotton  industry,  in  which  it  is 
most  productive,  into  an  industry  in  which  it  would  be  less  pro- 
ductive. If  the  new  industry  is  not  less  productive,  labor  and 
capital  would  go  into  it  anyway  ;  if  it  is  less  productive,  it  would 
be  a  waste  of  resources  to  divert  labor  and  capital  into  it  instead 
of  allowing  them  to  go  where  they  would  naturally  go. 

Against  this  fundamental  proposition  of  the  free-trade 
school  the  protectionists  have  never  been  able  to  launch  a 
successful  frontal  attack.  They  have,  however,  attacked  the 
policy  of  free  trade  at  other  points.  The  arguments  which 
they  have  been  able  to  use  have,  on  the  whole,  proved  some- 
what more  popular  than  this  severely  simple  doctrine  on  which 
the  free-trade  argument  is  based.  There  are  six  popular  argu- 
ments in  favor  of  protection,  besides  some  others  that  are  not 
so  popular,  though  perhaps  of  greater  scientific  weight.  These 
six  arguments  may  be  characterized  as  follows  :  ( i )  The  balance- 
of-trade  argument;  (2)  the  home-market  argument;  (3)  the 


340          PRINCIPLES  OF  POLITICAL  ECONOMY 

infant-industries  argument ;  (4)  the  standard-of-living  argu- 
ment ;  (5)  the  anti-dumping  argument ;  and  (6)  the  necessity- 
for-military-supplies  argument. 

The  balance-of-trade  argument.  By  the  balance-of-trade 
argument  is  meant  the  old  theory  that  a  nation  is  rich  when 
it  sells  abroad  more  than  it  buys.  There  is  a  certain  super- 
ficial analogy  between  the  condition  of  the  private  individual 
and  that  of  the  nation.  It  looks  at  first  thought  as  though  the 
private  individual  who  was  selling  more  than  he  was  buying  was 
getting  rich.  This,  however,  is  only  an  appearance.  It  is  true 
that  so  long  as  he  is  selling  more  than  he  is  buying  he  is 
accumulating  money ;  but  unless  he  invests  that  money  sooner 
or  later,  it  will  do  him  no  good.  When  he  invests,  he  is  really 
buying  something  with  it ;  otherwise  he  merely  becomes  a 
miser  and  hoards  his  money  instead  of  using  it.  The  indi- 
vidual who  saves  or  the  individual  who  accumulates  money  for 
a  time,  say  for  a  year,  may  be  prospering  in  the  sense  that 
he  is  accumulating  the  power  to  purchase  something  else  later 
on ;  but  suppose  that  during  the  next  year  he  invests  all  the 
accumulations  of  the  preceding  year,  then  it  will  happen  that 
during  this  next  year  he  will  be  buying  more  than  he  is  selling. 
No  one  will  claim  that  he  grows  poorer  by  the  process. 

Similarly  with  the  nation  that  continually  sells  more  than  it 
buys,  —  if  it  never  buys  anything  from  the  outside  with  that 
money,  the  money  is  of  no  use  to  it ;  if  it  merely  keeps  it  in 
circulation  within  its  own  boundaries,  it  will  have  more  money 
in  circulation,  but  no  more  goods.  Everybody  will  merely  mark 
up  prices  and  call  himself  rich.  Sooner  or  later,  however,  this 
process  must  come  to  an  end,  for  if  prices  continue  to  rise 
within  the  country,  it  becomes  a  poor  country  in  which  to  buy 
products.  Foreign  buyers  will,  so  far  as  possible,  go  to  other 
markets  for  their  supplies.  At  the  same  time  it  becomes  a 
good  country  in  which  to  sell.  Foreign  producers  will  seek  to 
sell  their  goods  within  the  country  where  high  prices  prevail, 
and  if  the  prices  are  high  enough,  the  protective  tariff  ceases 


FREE  TRADE  341 

to  be  a  hindrance.  The  combination  of  these  two  processes 
would  speedily  drain  some  of  the  surplus  money  out  of  the 
country ;  that  is,  when  foreign  producers  sell  large  quantities 
to  the  country,  and  foreign  buyers  buy  small  quantities,  there 
must  come  an  equilibrium  in  prices  so  far  as  the  com- 
modities which  enter  into  international  trade  are  concerned. 
There  are  some  commodities  and  services  which  do  not  enter 
into  international  trade,  and  the  prices  of  these  may  remain 
on  different  levels  for  considerable  periods  of  time. 

During  the  first  year  or  two  of  the  great  European  war, 
which  was  inflicted  upon  an  astonished  world  by  the  Turco- 
Teutonic  powers,  Americans  had  an  excellent  illustration  of 
the  fallacy  of  the  balance-of-trade  argument.  We  immediately 
began  selling  vast  quantities  of  supplies  to  the  Allies,  who 
were  defending  themselves  against  attack  and  invasion.  Their 
productive  power  was  diverted  from  the  field  of  industry  into 
the  field  of  war,  so  that  they  had  very  little  to  sell  to  us.  The 
consequence  was  that  vast  quantities  of  money  had  to  be  sent 
in  payment  for  the  supplies  which  we  sent  to  them.  It  looked 
for  a  time  as  though  we  were  prospering  amazingly  by  this 
process.  Money  was  very  abundant,  but  goods  were  becoming 
scarce.  It  was  not  long  before  the  people  began  to  realize  that 
they  could  not  live  on  money,  —  that,  after  all,  goods  were  what 
they  wanted.  Some  relief  came  when  the  United  States  began 
to  lend  the  money  back  again  to  the  Allies,  so  that  they  could 
purchase  more  and  more  supplies ;  that  is,  some  of  the  surplus 
money,  instead  of  being  used  in  the  purchase  of  ordinary  com- 
modities, was  used  in  the  purchase  of  foreign  securities,  including 
the  bonds  of  foreign  governments. 

Nothing  could  be  more  elementary  or  more  incontrovertible 
than  that  every  country  must  in  the  long  run  pay  for  its  foreign 
supplies  with  its  own  products.  If  it  happens  to  produce  gold 
and  silver  in  large  quantities,  these  of  course  must  be  reckoned 
among  its  own  products,  and  it  may  pay  for  a  portion  of  its 
foreign  supplies  with  this  gold  and  silver.  In  the  long  run, 


342          PRINCIPLES  OF  POLITICAL  ECONOMY 

therefore,  the  country  that  restricts  importation  must  necessarily, 
and  in  exactly  the  same  degree,  restrict  exportation. 

The  home-market  argument.  As  to  the  home-market  argu- 
ment, this  has  been  peculiarly  effective  with  farmers.  It  has 
been  pointed  out  to  them  that  unless  factories  are  built  up  in 
their  own  neighborhood,  they  must  depend  upon  distant  mar- 
kets for  the  sale  of  their  products.  To  sell  their  products  in 
these  distant  markets  and  get  their  own  supplies  back,  it  is 
said,  involves  heavy  expenses  in  the  form  of  freight  rates.  If 
these  expenses,  however,  were  so  heavy  as  to  overbalance  the 
other  advantages  and  disadvantages  involved,  manufacturing 
would  be  developed  in  the  home  market  without  any  govern- 
ment aid  or  interference.  If,  for  example,  the  difference  in 
the  cost  of  growing  wheat  in  Alabama  and  North  Dakota  were 
less  than  the  freight  rates  from  North  Dakota  to  Alabama, 
Alabama  would  find  it  advantageous,  without  any  government 
help,  to  grow  her  own  wheat ;  but  if  it  costs,  let  us  say,  twenty 
cents  more  per  bushel  to  grow  wheat  in  Alabama  than  in 
North  Dakota,  and  the  freight  rate  is  only  ten  cents,  then  it 
would  be  very  much  more  profitable  to  import  wheat  or  wheat 
flour  from  North  Dakota. 

The  same  principle  would  apply  to  manufacturing  products. 
If  the  difference  in  the  cost  of  manufacturing  a  yard  of  cloth 
in  Kansas  and  in  New  England  is  less  than  the  freight  rate 
from  New  England  to  Kansas,  some  cotton  manufacturer 
would  be  pretty  certain  to  locate  his  business  in  Kansas  in 
order  to  save  that  freight  rate  ;  but  if  the  difference  in  the  cost 
of  production  is  greater  than  the  freight  rate,  then  it  would  be 
a  mistake  to  encourage  the  manufacture  of  cloth  in  Kansas. 
This  principle  would  apply  between  different  countries  as 
well  as  between  different  sections  of  the  same  country.  The 
home  market,  in  short,  is  preferable  to  a  distant  market  only 
when,  with  a  given  amount  of  productive  energy,  more  can  be 
produced  by  saving  transportation  than  can  be  produced  even 
when  goods  have  to  be  transported  over  long  distances. 


FREE  TRADE  .  343 

The  infant-industries  argument.  As  to  the  infant-industries 
argument,  there  is  undoubtedly  something  to  be  said  on  the 
side  of  protection.  The  argument  is  good,  however,  only  on 
condition  that  the  infant  industry,  after  it  is  once  established 
and  ceases  to  be  an  infant  industry,  is  then  able  to  take  care 
of  itself  without  further  protection.  If  it  is  not,  and  if  it  con- 
tinually needs  protection,  it  becomes  not  a  policy  for  the 
protection  of  infant  industries  but  a  policy  for  the  protection 
of  those  that  are  in  a  state  of  senile  decay.  It  is  a  policy  for 
keeping  alive  industries  that  ought  to  be  dead. 

There  are  two  rather  fundamental  objections  to  a  protective 
policy  based  on  the  infant-industries  argument.  In  the  first 
place,  no  matter  how  much  protection  is  given  to  any  industry, 
there  will  always  be  certain  establishments  that  are  just  on  the 
margin  of  bankruptcy.  There  will  be  men  who  are  so  poorly 
qualified  for  managing  a  business,  or  who  have  located  their 
businesses  in  such  disadvantageous  places,  that  they  have  to 
compete  with  more  productive  industries  for  their  labor  and 
supplies,  and  are  thus  barely  able  to  keep  going.  Any  attempt 
to  double  and  treble  the  amount  of  production  merely  calls  into 
existence  business  establishments  run  by  less  qualified  managers 
or  located  in  less  advantageous  positions,  so  that  with  respect 
to  business  establishments  it  becomes  a  truism  that  "  the  poor 
ye  have  with  you  always."  Conversely,  any  attempt  to  take  away 
or  reduce  the  amount  of  protection  will  necessarily  mean  bank- 
ruptcy to  those  marginal  establishments.  They  can  always 
bring  pressure  to  bear  upon  Congress  and  can  always  show- 
convincingly  that  they  would  be  ruined  if  protection  were  taken 
away.  Thus  the  infant-industries  argument  sooner  or  later 
inevitably  becomes  an  argument  in  behalf  of  the  small  or  the 
inefficient  producer.  In  the  second  place,  as  laws  are  made  in 
any  democratic  country,  the  lobby  (which  has  sometimes  been 
called  the  third  House  of  Congress)  is  a  powerful  factor.  The 
real  infant  industry  is  seldom  able  to  support  a  powerful 
lobby.  Generally  speaking,  the  larger  and  more  prosperous  the 


344          PRINCIPLES  OF  POLITICAL  ECONOMY 

industry,  the  larger  and  more  efficient  the  lobby  which  it  can 
support.  This  makes  it  extremely  improbable  that  the  infant 
industry  will  get  protection  and  extremely  probable  that  the 
gigantic  industry  will  get  it. 

The  standard-of-living  argument.  By  the  standard-of-living 
argument  is  meant  the  argument  that,  since  American  laborers 
get  higher  wages  and  maintain  a  higher  and  more  expensive 
standard  of  living  than  most  foreign  laborers,  it  is  necessary 
to  compensate  the  manufacturer  for  these  higher  wages  by 
enabling  him  to  get  somewhat  higher  prices  for  his  product. 
From  the  free-trader's  point  of  view  this  looks  like  putting  the 
cart  before  the  horse.  The  reason  why  wages  are  higher  in 
one  country  than  in  another  is  because  labor  is  more  productive 
in  the  one  than  in  the  other.  If  labor  is  more  productive,  the 
laborer  creates  the  product  out  of  which  his  higher  wages  are 
to  be  paid.  We  have  had  such  an  abundance  of  natural  resources, 
and,  on  the  whole,  compared  with  old  and  overcrowded  coun- 
tries, such  a  dearth  of  labor,  that  the  marginal  productivity  of 
labor  has  been  high  in  this  country.  The  unprotected  industries 
pay  these  wages  as  well  as  the  protected.  If  a  given  industry 
is  not  able  to  compete  against  agriculture  and  mining  in  hiring 
labor,  that  is  a  sign  that  the  industry  in  question  is  not  as  pro- 
ductive as  agriculture  and  mining.  Therefore  it  would  be  a 
mistake  to  tax  the  more  productive  industries  in  order  to  allow 
a  bounty  or  a  higher  price  to  the  less  productive  industry.  In 
the  past,  at  any  rate,  there  have  been  so  many  opportunities  for 
poor  people  to  go  onto  the  land  and  work  for  themselves  and 
eventually  become  landowners  that  manufacturers  have  had 
some  difficulty  in  getting  labor  for  their  factories.  In  other 
words,  labor  has  found  a  better  opportunity  somewhere  else. 
Two  methods  have  been  resorted  to  by  the  manufacturers  to 
overcome .  this  difficulty.  One  has  been  the  wholesale  importa- 
tion of  foreign  labor ;  the  other  is  the  securing  of  protective 
duties  in  favor  of  their  business.  It  would  seem  that  anyone 
with  a  sense  of  humor  could  hardly  keep  his  face  straight 


FREE  TRADE  345 

while  importing  the  cheapest  kind  of  foreign  labor  to  fill  his 
factory  and  at  the  same  time  demanding  protection  in  order 
that  American  labor  might  maintain  its  high  standard  of  living. 

The  anti-dumping  argument.  As  to  the  anti-dumping  argu- 
ment, there  is  a  certain  justification  for  it.  By  the  anti-dumping 
argument  is  meant  the  argument  that  an  old  and  well-established 
industry  may,  whenever  it  finds  itself  with  a  surplus  product 
which  is  difficult  to  sell  in  its  own  country,  offer  it  for  sale 
in  a  foreign  country  far  below  the  cost  of  production ;  or,  as 
the  argument  is  put  in  the  country  where  protection  is  advo- 
cated, the  foreign  producer  may  dump  his  surplus  onto  our 
markets  and  demoralize  the  business  of  production  here. 

In  so  far  as  this  dumping  policy  is  temporary  and  spasmodic, 
there  is  a  good  deal  to  be  said  in  favor  of  the  policy  which  will 
restrict  it.  If,  for  example,  a  group  of  foreign  manufacturers 
were  to  dispose  of  a  temporary  surplus  in  this  country  far  below 
the  cost  of  production,  and  keep  it  up  spasmodically  for  a  few 
years,  it  might  cause  bankruptcy  among  our  own  producers 
and  discourage  others  from  entering  the  business.  As  a  result 
we  might  find  ourselves  in  a  short  time  with  no  industry  of  our 
own.  Then  the  foreign  producers  would  no  longer  need  to  dump 
their  surplus  onto  us,  but  could  charge  us  a  good  high  price. 

On  the  other  hand,  if  the  policy  of  dumping  a  surplus 
product  onto  us  is  a  permanent  one,  there  is  everything  to  be 
said  in  favor  of  allowing  it  to  go  on  and  allowing  the  home 
industry  to  die  out.  It  merely  enables  us  to  get  permanently 
a  product  much  cheaper  than  we  could  produce  it  ourselves. 
The  labor  and  capital  which  would  otherwise  be  engaged  in  this 
industry  would  now  better  be  engaged  in  some  other.  It  has 
been  humorously  pointed  out  that  the  greatest  case  of  dumping 
in  the  world  is  that  of  the  sun,  which  sends  us  light  and  heat  at 
ruinously  low  prices.  Inasmuch  as  it  is  a  permanent  policy  of 
the  sun,  we  can  easily  adjust  ourselves  to  it  and  dispense  with 
any  industry  which  would  propose  to  supply  us  with  daylight 
and  summer  heat. 


346          PRINCIPLES  OF  POLITICAL  ECONOMY 

Not  many  years  ago  certain  countries  gave  a  bounty  for  the 
export  of  sugar.  This  looked  like  a  permanent  policy  for  en- 
couraging the  dumping  of  a  certain  commodity  on  other  markets. 
The  chief  result  was  that  England,  a  free-trade  country,  got  an 
abundant  supply  of  very  cheap  sugar.  This  not  only  gave  her 
a  cheap  food  product  but  enabled  her  to  develop  certain  indus- 
tries, such  as  the  making  of  jam  and  marmalade,  on  a  large 
scale,  and  to  sell  the  products  of  these  industries  on  the  markets 
of  the  world,  sometimes  selling  them  back  to  the  countries 
which  had  given  a  bounty  on  the  exportation  of  sugar. 

The  military-defense  argument.  So  long  as  war  is  a  possi- 
bility the  necessity  for  military  defense  will  remain  with  us, 
and  so  long  as  we  must  be  prepared  for  military  defense  the 
argument  in  favor  of  producing  certain  essential  military  sup- 
plies at  home,  even  at  greater  cost  than  they  could  be  produced 
abroad,  will  be  overwhelming.  It  is  obvious  that  at  the  very 
time  when  we  need  military  supplies  most  —  in  time  of  war  — 
we  may  not  be  able  to  get  them  at  all  if  we  depend  upon  for- 
eign sources.  This  would  apply  not  only  to  military  supplies 
in  the  technical  sense,  that  is,  goods  and  ammunitions,  but  also 
to  every  article  which  is  indispensable  in  time  of  war.  It  might 
easily  happen  that  a  nation  would  fail  in  its  military  operations 
by  reason  of  a  lack  of  some  single  military  article  like  nitro- 
gen or  copper,  and  suffer  a  national  disaster  and  humilation  in 
consequence.  Until  we  can  be  reasonably  certain  that  war  has 
been  permanently  eliminated,  the  argument  for  government  en- 
couragement of  the  production  of  every  indispensable  military 
article  is  overwhelming.  The  free-trader  really  has  nothing 
effective  to  say  against  it. 

Aside  from  these  six  arguments  there  are  certain  large  his- 
torical arguments  that  are  frequently  used  by  the  protectionist. 
It  is  pointed  out,  for  example,  that  America  has  prospered 
amazingly  under  a  protectionist  policy.  It  is,  however,  equally 
true  that  England  has  prospered  amazingly  under  her  free- 
trade  policy.  She  became  prosperous  before  her  European 


FREE  TRADE  347 

neighbors  did,  and  outstripped  them  all,  at  least  during  the 
first  half  century  of  her  free-trade  policy.  Again,  the  protec- 
tionist points  to  the  recent  rapid  advance  in  prosperity  and 
industrial  power  of  Germany  as  an  example  of  the  beneficence 
of  the  protectionist  policy.  To  this  the  free-trader  can  retort 
that  Germany's  prosperity  began  with  the  formation  of  the 
present  Empire  after  1870.  The  taking  away  of  the  tariff  walls 
between  the  German  states  and  the  establishing  of  a  free-trade 
area  within  the  whole  Empire  created  a  much  larger  free- 
trade  area  than  had  formerly  existed.  Secondly,  the  efficiency 
of  the  German  system  of  technical  education  has  contributed 
more  than  any  other  single  factor  to  her  prosperity.  In  the  third 
place,  Germany  has  had  the  advantage  of  a  lower  standard  of 
living.  England  became  prosperous  long  before  Germany  did, 
and  as  a  result  of  her  prosperity  wages  rose,  and  likewise  salaries 
and  all  living  expenses.  The  English  workingman  gets  higher 
wages  than  the  German  workingman.  All  the  salaried  men  in 
English  factories  get  higher  wages  and  work  shorter  hours  than 
the  salaried  men  in  German  factories.  The  English  agents  in 
foreign  ports  not  only  get  higher  salaries,  but  insist  on  week- 
end holidays  and  on  having  several  afternoons  off  during  the 
week  in  order  to  play  golf  and  tennis,  whereas  the  German 
agent  works  continually  every  day  and  Sunday.  In  other  words, 
part  of  Germany's  advantage  has  been  her  lower  standard  of 
living.  The  free-trader  would  say,  "  Let 's  wait  and  see  how 
long  Germany  can  maintain  her  low  standard  of  living  after 
she  becomes  as  prosperous  as  England  has  been."  It  may  be 
that  after  she  has  enjoyed  prosperity  as  long  as  England  has, 
there  will  come  the  same  softening  in  her  vigor,  the  same 
desire  for  luxurious  expenditure  and  leisure,  and  she  will  thus 
lose  her  chief  advantage  in  international  competition.  If  it  is 
any  comfort  for  the  protectionist  to  point  out  that  free  trade 
tends  to  overprosperity,  and  prosperity  to  softening,  he  is 
welcome  to  it. 


CHAPTER  XXIX 
PROTECTIONISM 

The  weight  of  the  argument  in  the  last  chapter  was  over- 
whelmingly in  favor  of  free  trade  except  in  the  matter  of  war 
supplies.  Sometimes,  however,  it  seems  as  though  the  free- 
traders were  willing  and  able  to  answer  all  the  arguments  in 
favor  of  protection  except  the  real  ones.  They  confine  them- 
selves, in  other  words,  to  the  popular  arguments  which  have 
not  now  and  never  did  have  any  support  from  serious  students 
of  the  problem.  The  following  arguments  may  not  appeal  to  the 
popular  mind,  nor  furnish  much  support  to  any  particular  tariff 
bill.  They  do,  however,  outline  certain  possibilities  of  a  protec- 
tive tariff  if  the  government  really  wants  to  go  about  it  seriously. 

Some  possibilities  of  a  protective  tariff.1  (i)  A  tariff  duty 
is  not  necessarily  paid  by  the  home  consumer ;  (2)  a  protective 
tariff  may  be  so  framed  as  to  raise  wages ;  (3)  it  may  be  so 
framed  as  to  attract  labor  and  capital  from  the  less  productive 
into  the  more  productive  industries, — judged  from  the  stand- 
point of  the  community  rather  than  from  that  of  the  individual 
business  man. 

When  the  consumer  pays  the  tariff.  Whether  the  home  con- 
sumer pays  the  tariff  duty  or  not  depends  upon  whether  or 
not  the  tariff  duty  raises  the  price,  in  the  home  market,  of  the 
article  upon  which  it  is  collected.  Whether  it  raises  the  price 
or  not  depends  upon  whether  it  reduces  the  supply  of  the  article 
in  the  home  market  or  not,  it  being  assumed  that  the  duty 
will  not  affect  the  demand.  The  effect  of  a  duty  is  ordinarily 

1  The  rest  of  this  chapter  is  from  a  paper  read  by  the  author  before  the 
American  Economic  Association  and  published  in  the  Proceedings  of  the 
association  in  1902. 

348 


PROTECTIONISM  349 

to  reduce  the  amount  of  the  article  imported.  The  question 
is,  Will  the  home  product  then  increase,  as  a  result  of  the  duty, 
sufficiently  to  counterbalance  the  diminution  in  the  amount 
imported  ?  If  the  conditions  are  such  that  a  tariff  duty  will 
occasion  an  increase  in  the  domestic  product  equal  to  the 
diminution  in  the  amount  imported,  the  duty  will  occasion  no 
change  in  the  total  supply  on  the  home  market,  and  conse- 
quently no  general  change  in  the  price  of  the  article  ;  but  if 
the  domestic  product  does  not  increase  sufficiently  to  offset 
entirely  the  diminution  in  the  amount  imported,  there  will  be 
a  decrease  in  the  total  supply  on  the  home  market,  and  con- 
sequently a  rise  in  price. 

When  the  increase  in  home  production  offsets  the  decrease  in 
importation.  The  question  then  becomes,  Under  what  con- 
ditions will  a  tariff  duty  occasion  an  increase  in  the  domestic 
product  sufficient  to  counterbalance  the  diminution  in  the 
amount  imported  ?  If  the  duty  is  laid  upon  an  article  not 
producible  at  home  under  existing  conditions  and  at  existing 
prices,  there  can  manifestly  be  no  such  increase  in  the  domes- 
tic product,  and  the  price  will  rise  in  consequence  of  the  duty. 
How  large  a  share  of  the  duty  will  be  added  to  the  price  of 
the  article  will  depend  upon  the  comparative  elasticity  of  the 
demand  and  the  supply. 

When  the  foreign  producer  pays  the  tariff.  If  the  demand 
is  highly  elastic,  while  the  supply  is  inelastic,  only  a  small  pro- 
portion of  the  duty  will  be  added  to  the  price ;  that  is  to  say, 
an  elastic  demand  means  that  if  there  is  a  slight  rise  in  the 
price  of  the  article  to  the  consumer,  it  will  cause  a  great  fall- 
ing off  in  the  amount  purchased.  In  other  words,  the  con- 
sumer may  be  said  to  have  considerable  power  of  resistance. 
On  the  other  hand,  if  a  considerable  fall  in  the  price  which 
the  producer  can  get  will  cause  only  a  slight  falling  off  in  the 
amount  produced,  as  will  happen  when  there  are  considerable 
differences  in  the  cost  of  producing  different  parts  of  the  sup- 
ply, the  supply  is  inelastic.  When  the  demand  is  elastic  and 


350          PRINCIPLES  OF  POLITICAL  ECONOMY 

the  supply  relatively  inelastic,  the  burden  of  a  tariff  duty  will 
be  borne  largely  by  the  foreign  producer  and  only  to  a  slight 
degree  by  the  home  consumer.  Reversing  the  argument  we 
shall  reach  the  conclusion  that  when  the  demand  for  the  article 
is  inelastic  and  the  supply  relatively  elastic,  the  burden  of  the 
duty  will  fall  largely  upon  the  home  consumer. 

When  a  tariff  is  prohibitive.  When  both  the  supply  and  the 
demand  are  very  elastic,  a  tariff  duty  will  tend  to  be  prohibitive  ; 
that  is  to  say,  if  a  slight  rise  in  the  price  to  the  consumer 
would  cause  a  large  falling  off  in  the  amount  consumed,  and  a 
slight  fall  in  the  price  to  the  producer  would  cause  a  great  falling 
off  in  the  amount  sent  to  the  tariff  country,  manifestly  neither 
the  producer  nor  the  consumer  can  be  made  to  pay  the  tariff 
and  the  article  will  practically  cease  to  be  imported. 

If  the  article  is  produced  at  home,  but  under  the  law  of 
expanding  cost  (commonly  confused  with  the  law  of  diminish- 
ing returns),  the  presumption  is  that  as  much  is  already  being 
produced  at  any  given  time  as  can  be  produced  at  existing 
prices.  The  one  condition  for  an  increase  in  the  home  product 
is  that  there  shall  be  a  rise  in  price.  It  is  evident  that  the 
domestic  product  could  not  increase  sufficiently  to  keep  the 
prices  down,  for  the  reason  that  if  the  prices  were  kept  down, 
there  could  be  no  increase  in  the  home  production.  A  duty 
on  such  an  article  would  raise  the  price  of  the  article,  and  be 
borne,  in  part  at  least,  by  the  home  consumer. 

In  case  the  duty  is  laid  upon  an  article  which  is  produced  at 
home  under  the  law  of  diminishing  cost  (provided  its  production 
has  not  been  monopolized),  a  different  result  follows.  In  a  case 
of  this  kind  the  shutting  out  of  a  part  of  the  foreign  supply 
increases  the  opportunities  for  the  marketing  of  the  home  prod- 
uct ;  and  since  the  home  product  can  be  increased  without  any 
increase  in  cost,  there  is  nothing  to  prevent  it  from  increasing 
enough  to  offset  entirely  any  diminution  in  the  amount  im- 
ported. In  this  case  there  is  no  reason  to  expect  that  the  price 
will  be  higher  under  the  tariff  than  it  would  be  without  the  tariff. 


PROTECTIONISM  351 

The  shutting  out  of  a  part  of  the  foreign  supply  is  analogous 
to  a  normal  growth  in  the  consumption  of  the  article,  —  at 
least  in  so  far  as  it  affects'  the  home  producers.  They  find 
an  increase  in  the  consumption  of  their  products,  and  it 
makes  no  difference  to  them  whether  this  is  due  to  a  decrease 
in  importation  or  to  a  growth  in  the  normal  consumption  of 
the  article.  Few  economists  would  contend  that  a  normal 
growth  in  the  consumption  of  an  article  which  could  be  in- 
definitely increased  at  diminishing  cost  would  cause  the  article 
to  sell  at  a  higher  price.  It  is  the  position  of  this  chapter  that 
there  is  no  better  ground  for  contending  that  a  tariff  duty  on 
an  article  already  producible  at  home  under  the  law  of  dimin- 
ishing cost  would  raise  the  price  of  the  article,  or  that  when 
there  is  no  natural  check,  such  as  increasing  cost,  to  the  home 
production,  there  is  no  reason  why  the  home  production  may 
not  increase  enough  to  make  up  entirely  for  any  falling  off 
in  the  amount  imported.1 

The  case  of  monopoly.  If,  however,  the  article  is  one  whose 
home  production  is  in  the  hands  of  a  monopoly,  the  shutting 
out  of  a  part  of  the  foreign  product  would  increase  the 
monopoly's  power  over  the  home  market  and  give  it  an  oppor- 
tunity to  exact  a  somewhat  higher  price  than  would  otherwise 
be  possible.  There  is  a  very  widespread  belief  that  a  monopoly 
fixes  the  price  of  its  product  according  to  a  different  principle 
from  that  which  is  followed  by  a  single  producer  in  a  competi- 
tive industry  ;  but  such  is  not  the  case.  In  either  case  the  price 
is  fixed  at  the  point  which  will  yield  the  largest  net  income  to 
the  producer.  The  difference  is  that  the  individual  producer  in 
a  competitive  industry  has  to  face  a  different  set  of  conditions 
from  that  which  confronts  the  monopolists.  The  competitive 
producer  knows  that  if  he  charges  too  high  a  price  for  his 
products,  his  sales  will  fall  off  rapidly,  not  only  through  the 
unwillingness  of  the  public  to  buy  the  product,  but  also  through 

1  In  fact,  there  are  reasons  for  believing  that  the  price  would  fall.  Cf. 
Alfred  Marshall,  Principles  of  Economics,  4th  ed.,  p.  525. 


352          PRINCIPLES  OF  POLITICAL  ECONOMY 

the  underselling  of  his  competitors.  If  he  held  a  monopoly, 
he  would  know  that  a  similar  rise  in  the  price  of  the  product 
would  cause  his  sales  to  fall  off  less  rapidly,  because  only  one, 
namely,  the  former,  of  those  two  forces  would  operate. 

While  both  the  monopolist  and  the  competitive  producer  try 
to  sell  at  the  point  of  highest  net  return,  that  point  is  likely  to 
be  somewhat  different  in  the  two  cases,  because  of  the  differ- 
ences in  the  conditions  which  confront  the  two  producers.  The 
competitive  producer  has  two  checks  on  high  prices,  where  the 
monopolist  has  one.  Hence  monopoly  price  is  likely  to  be 
higher  than  competitive  price.  A  tariff  duty  which  shuts  out  a 
part  of  the  foreign  product  removes  one  of  the  checks  upon 
the  power  of  a  monopoly  to  charge  high  prices,  and  changes 
the  location  of  the  point  of  highest  net  return. 

Can  a  tariff  increase  wages?  Whether  a  protective  tariff 
can  increase  the  price  of  labor  or  not  depends  first  upon 
whether  or  not  it  is  possible,  by  means  of  a  tariff,  to  increase 
the  demand  for  labor  relatively  to  the  demand  for  other  factors 
of  production.  If  this  can  be  done,  labor  will  get  a  larger  share 
of  the  total  product  of  the  industry  of  the  community.  This 
alone  would  not  prove  that  the  individual  laborer  would  in  the 
end  be  better  off.  In  the  first  place,  the  supply  of  labor  might 
increase  correspondingly,  either  through  immigration  or  by 
natural  means,  and  in  this  event  there  would  be  no  increase 
in  individual  wages,  even  though  a  larger  share  of  the  total 
product  did  go  to  the  payment  of  labor.  In  the  second  place, 
the  tariff  might  diminish  the  total  product  of  industry  so  that, 
even  though  the  laborers  did  get  a  larger  share  of  the  total,  the 
absolute  amount  going  to  them  as  wages  might  be  no  greater 
than,  indeed  not  so  great  as,  before. 

As  to  the  first  objection,  it  needs  only  to  be  said  that  if  the  tariff 
increases  the  demand  for  labor,  that  will  tend  to  raise  wages. 
Whether  or  not  this  tendency  will  be  counteracted  by  immigration 
or  by  natural  increase  depends  upon  other  conditions.  If  the 
tariff  stimulates  immigration  or  increases  the  birth  rate  over  what 


PROTECTIONISM  353 

it  would  be  without  a  tariff,  the  presumption  is  that  it  does  so 
because  it  increases  the  demand  for  labor  and  raises  wages,  which 
is  all  that  this  chapter  contends  for.  Wages  may  or  may  not 
be  subsequently  reduced  to  the  old  level"  by  other  forces  counter- 
acting the  tendency  of  the  tariff.  As  the  second  condition,  it  is 
hoped  that  the  third  part  of  this  paper  will  show  that  a  protective 
tariff  does  not  necessarily  diminish  the  total  product  of  industry. 

Owing  to  the  limited  space  available  it  is  necessary  to  assume 
two  premises  as  the  basis  of  the  argument  for  the  proposition 
that  a  protective  tariff  may  be  so  framed  as  to  raise  wages 
within  the  country,  (i)  The  three  factors  of  production — land, 
labor,  and  capital — are  combined  in  different  proportions  in  the 
production  of  different  commodities.  (2)  A  selected  industry 
may  be  stimulated  and  made  to  grow  by  means  of  a  protective 
tariff.  Both  these  propositions  could  be  proved  if  space  allowed, 
but  neither  is  likely  to  be  disputed  by  any  considerable  number 
of  people.  Assuming  them  to  be  true,  it  is  only  necessary  to 
stimulate,  by  means  of  a  protective  tariff,  the  production  of 
those  articles  into  which  labor  enters  as  the  principal  factor, 
leaving  unprotected  those  industries  into  which  labor  enters  as 
a  relatively  less  important  factor.  This  is  a  process  of  artifi- 
cial selection  in  which  the  variation  which  makes  selection 
possible  is  found  in  the  different  proportions  in  which  the 
three  factors  are  combined  in  the  different  industries.  The 
favorable  variations,  from  the  standpoint  of  the  laboring  class, 
are  those  industries  in  which  labor  is  relatively  the  more  impor- 
tant factor,  and  the  unfavorable  variations  are  those  in  which 
labor  is  relatively  the  less  important  factor.  In  order  to  favor 
the  laboring  class  it  is  only  necessary  to  select  the  favorable 
variations  ;  that  is,  to  build  up  by  artificial  means  those  indus- 
tries in  which  labor  is  the  principal  factor.  Even  though  this 
should  result  in  a  corresponding  injury  to  other  industries, 
there  would  still  remain  a  net  gain  to  labor. 

Let  us  suppose,  by  way  of  illustration,  that  in  industry  A,  at 
a  given  period,  the  best  results,  from  the  standpoint  of  the 


354 


PRINCIPLES  OF  POLITICAL  ECONOMY 


entrepreneur,  are  ordinarily  obtained  by  combining  1000  acres 
of  land,  10  laborers,  and  $100,000  worth  of  capital.  These 
yield  a  product  worth  $20,000.  In  industry  B,  to  get  a  product 
of  the  same  value,  the  best  results  would  be  obtained  from 
combining  the  factors  in  the  following  proportions  :  10  acres 
of  land,  20  laborers,  and  $100,000  worth  of  capital.  Wages 
and  interest  are  assumed  to  be  the  same  in  both  industries. 
For  the  sake  of  simplicity,  capital  is  assumed  to  bear  the  same 
ratio  to  product  in  both  industries,  land  and  labor  being  the 
varying  factors.  By  building  up  industry  B,  even  at  the 
expense  of  industry  A,  there  will  result  a  net  increase  in 
employment  of  labor,  though  a  corresponding  decrease  in  the 
employment  of  land.  This  increase  in  the  employment  of  labor 
means  an  increase  in  the  demand  for  labor,  while  the  decrease 
in  the  employment  of  land  means  a  decrease  in  the  demand 
for  land.  The  result  of  this  situation  would  be  that  a  larger 
share  of  the  total  product  would  go  in  the  payment  of  wages 
and  a  smaller  share  in  the  payment  of  rent. 

In  the  following  tables,  I  represents  the  conditions  as  described 
above ;  II,  the  situation  after  industry  B  has  been  expanded 
50  per  cent  and  industry  A  has  been  correspondingly  contracted. 


ACRES 

LABOREKS 

CAPITAL 

PRODUCT 

Industry  A    

IOOO     • 

IO 

$  I  OO,OOO 

$2O,OOO 

Industry  B    

IO 

2O 

IOO.OOO 

2O.OOO 

Totals    

IOIO 

•to 

$2OO,OOO 

$40,000 

II 


ACRES 

LABORERS 

CAPITAL 

PRODUCT 

Industry  A    

soo 

e 

$50,000 

$IO,OOO 

Industry  B    

IS 

30 

1  5O,OOO 

30,000 

Totals    

;  l  C 

-ii 

$2OO,OOO 

$40,000 

This  shows  a  decrease  of  495  in  the  number  of  acres  used  and  an  increase 
of  5  in  the  number  of  men  employed. 


PROTECTIONISM  355 

We  need  here  to  guard  against  the  possibility  that  industry 
B,  while  using  fewer  acres  of  land,  might  require  a  kind  of 
land  that  is  so  very  scarce  that  the  rent  charge  would  be  higher 
than  in  A.  But  this  is  not  a  necessary  condition.  It  is  quite 
conceivable  that  the  two  industries  would  use  the  same  grade 
of  land.  It  is  even  conceivable  that  industry  B,  in  addition  to 
using  fewer  acres,  would  also  use  a  more  abundant  kind  of 
land,  where  rents  were  less  per  acre.  The  whole  difficulty  could 
be  avoided  by  starting  with  the  proposition  that  in  different 
industries  rent  charges,  wages,  and  interest  enter  in  varying 
proportions.  Then,  by  selecting  for  governmental  favor  those 
industries  in  which  wages,  rather  than  rent  or  interest,  form  the 
chief  item  of  expense,  the  total  industry  of  the  country  would 
be  affected  favorably  from  the  standpoint  of  the  wage  receivers. 

It  goes  without  saying  that  an  entirely  different  result  would 
be  obtained  by  selecting  for  governmental  favor  those  industries 
in  which  rent  or  interest  formed  the  chief  item  of  expense,  — 
a  result  advantageous  to  the  landlord  or  the  capitalist,  but  dis- 
advantageous to  the  laborer.  It  must  be  confessed  also  that 
as  protectionism  has  been  applied  in  the  past,  especially  in 
England  before  the  repeal  of  the  corn  laws,  this  result  was 
quite  as  frequently  obtained  as  the  other.  There  is  some  danger 
also  that  it  will  be  so  in  the  future,  owing  to  the  better  lobby- 
ing facilities  of  the  landowning  and  capitalistic  classes.  But 
that  is  another  matter. 

Does  a  tariff  favor  the  less  productive  industries?  The 
proposition  that  protection  attracts  labor  and  capital  from  the 
more  productive  to  the  less  productive  industries  has  long  been 
one  of  the  basic  principles  of  the  free-trade  school,  —  the  rock 
on  which  all  protectionist  theories  were  supposed  to  split.  And 
it  must  be  conceded  that  unless  this  position  can  be  success- 
fully assailed,  the  free-trader  will  always  have  the  advantage  in 
the  argument. 

The  difficulty  with  the  proposition  lies  in  the  double  mean- 
ing which  is  given  to  the  word  productive.  In  order  to  make. 


356          PRINCIPLES  OF  POLITICAL  ECONOMY 

a  true  proposition  of  it,  that  word  must  be  given  a  certain 
meaning;  but  in  order  to  make  it  a  conclusive  argument,  it 
must  have  quite  a  different  meaning.  From  the  standpoint  of 
the  individual  business  man  a  productive  industry  is  a  profit- 
able J  industry ;  that  is,  an  industry  which  offers  the  oppor- 
tunity of  making  a  surplus  gain  over  the  cost  of  running  the 
business.  From  the  standpoint  of  the  community  a  productive 
industry  is  one  which  increases  the  sum  total  of  utilities.  It 
is  the  profitableness  of  the  industry,  rather  than  its  productive- 
ness in  the  latter  sense,  which  causes  labor  and  capital  to  go 
into  it.  It  is  only  by  defining  productive  as  "profitable"  that 
one  can  support  the  proposition  that  labor  and  capital  will  seek 
those  industries  which  are  naturally  most  productive.  In  that 
sense,  and  in  that  sense  alone,  it  is  quite  true  that  protection 
attracts  labor  and  capital  from  the  more  productive  to  the  less 
productive  industries. 

Meaning  of  the  word  productive.  But  in  order  to  have  any 
weight  as  an  argument  this  proposition  must  mean  that  pro- 
tection attracts  labor  and  capital  from  those  industries  which 
create  more  utilities  into  those  which  create  fewer  utilities. 
That  is  to  say,  the  word  productive  must  mean  something 
more  than  "profitable."  The  difficulty  could  be  met  only  by 
showing  that  a  profitable  industry  from  the  standpoint  of  the 
individual  business  man  is  always  a  productive  industry  from 
the  standpoint  of  the  community.  If  this  cannot  be  shown,  it 
would  mean  that  labor  and  capital,  if  left  to  themselves,  will, 
in  seeking  the  largest  profits,  sometimes  go  into  the  less  pro- 
ductive industries.  There  would  then  be  a  possibility  that 

1  For  want  of  a  better  term  the  words  profit  and  profitable  are  used  in 
the  more  popular  sense,  which  agrees  with  the  use  of  the  terms  by  the  older 
writers  on  economics.  Profit  is  made  to  include  the  surplus  income  of 
an  industry  over  and  above  the  cost  of  conducting  it.  In  this  broad  sense  it 
includes  rent  and  every  other  form  of  surplus.  A  profitable  industry  would 
therefore  be  one  which  would  yield  a  surplus  income  of  some  kind.  This 
surplus  is  what  attracts  the  director  of  industry,  and  it  is  the  surplus-producing 
power  of  an  industry  which  determines  whether  or  not  labor  and  capital  shall 
go  into  it. 


PROTECTIONISM  357 

protection  or  some  other  form  of  government  interference 
might  be  able  to  attract  labor  and  capital  from  a  less  produc- 
tive industry,  into  which  it  would  naturally  go  in  pursuit  of 
profits,  into  a  more  productive  industry,  from  which  it  would 
naturally  have  been  excluded  by  the  smallness  of  the  profits. 
This  possibility  would  become  a  reality  if  the  relative  profitable- 
ness of  the  two  industries  could  be  reversed  by  some  kind 
of  government  discrimination. 

The  question  then  becomes,  Are  the  more  profitable  indus- 
tries always  the  more  productive  ?  Manifestly  not.  Saying 
nothing  of  certain  lines  of  business  which  are  acquisitive  in 
their  nature  and  not  productive  at  all,  there  are  certain  highly 
productive  industries  which  have  very  little  power  of  attracting 
individual  enterprise. 

To  begin  with  an  extreme  case,  there  is  the  work  of  main- 
taining lighthouses.  This  illustration  is  chosen,  not  because  it 
is  supposed  to  be  typical  of  those  industries  which  are  fitted  to 
receive  protection,  but  solely  because  it  serves  to  make  clear 
that  there  may  be  a  productive  industry  which  offers  no  induce- 
ments for  private  enterprise.  On  the  one  hand,  this  work  has 
all  the  earmarks  of  a  productive  industry.  It  produces  a  real 
utility ;  this  utility  is  of  a  materialistic  sort  and  not  moral  or 
social,  as  is  that  produced  by  educational  and  other  similar  in- 
stitutions ;  and  it  is  produced  by  purely  mechanical  processes. 
There  is  nothing  in  the  nature  of  the  utility  produced,  or  its 
processes  of  production,  to  distinguish  this  from  any  money- 
making  business.  On  the  other  hand,  this  industry  offers  no 
incentive  to  private  enterprise,  that  is,  no  opportunity  for 
private  profits,  for  the  one  sufficient  reason  that  the  producer 
cannot  control  his  product.  It  will  shine  upon  those  who  do 
not  pay  for  it  as  well  as  upon  those  who  do.  He  is  therefore  not 
in  a  position  to  exact  a  payment  for  his  product  corresponding 
to  its  utility. 

It  will  doubtless  be  objected  that  this  is  a  case  calling  for 
government  ownership  and  operation  rather  than  protection, 


358          PRINCIPLES  OF  POLITICAL  ECONOMY 

and  the  point  would  be  well  taken.  This  is  a  business  so  com- 
pletely devoid  of  opportunity  for  profitable  enterprise  that  no 
kind  of  protective  tariff  would  be  able  to  make  it  profitable. 
Nothing  but  a  subsidy  could  induce  private  capital  to  go  into 
it,  and  the  subsidy  would  have  to  cover  the  whole  cost.  In  that 
case  the  government  might  just  as  well,  it  may  be  maintained, 
own  and  carry  on  the  business.  But  the  difference  between  this 
industry  and  one  which  would  lend  itself  to  protective  measures 
is  one  of  degree  only. 

Industries  differ  widely  in  this  particular :  whereas  one, 
such  as  the  maintenance  of  lighthouses,  produces  a  utility  that 
cannot  be  controlled  at  all  in  the  interest  of  the  owner,  another 
produces  a  utility  of  such  a  nature  that  the  owner  can  exact 
full  payment  from  those  who  use  it,  while  still  another  pro- 
duces no  utility  at  all,  but  is  purely  acquisitive  in  its  nature. 
An  example  of  the  last  (not  to  come  too  near  home)  would  be 
the  medieval  baron  who  took  possession  of  a  natural  ford  or 
a  mountain  pass  and  set  up  his  castle  and  went  into  the  busi- 
ness of  collecting  toll  of  all  who  passed  that  way.1  These  three 
industries  do  not  belong  to  sharply  differentiated  classes,  but 
they  shade  off  gradually  into  one  another.  That  is  to  say,  there 
is  a  gradual  shading  off  from  the  business  which  creates  utilities 
far  in  excess  of  any  amount  which  the  owner  of  the  business 
can  collect,  to  the  business  which  can  collect  a  revenue  far  in 
excess  of  any  utility  actually  created  by  it.  Here  again  we  have 

1  This  is  a  business  to  which  the  principle  of  "  charging  what  the  traffic 
will  bear  "  appjies  beautifully.  What  the  traffic  will  bear  is,  in  this  case,  deter- 
mined by  the  superiority  of  the  ford  or  pass  compared  with  the  poorest 
ford  or  pass  over  which  traffic  could  afford  to  go.  Let  us  assume  that  in- 
stead of  merely  collecting  toll  the  baron  spends  some  trifling  sum  in  the  im- 
provement of  the  passage,  still  charging  what  the  traffic  will  bear.  His  business 
then  becomes  slightly  productive,  but  its  productiveness  is  small  as  compared 
with  its  profitableness.  Then  let  us  assume  that  he  gradually  increases  his 
expenditures  for  improvement  of  the  passage  until  the  utility  created  approxi- 
mates more  and  more  nearly  to  the  charges  collected ;  at  each  stage  of  the 
process  his  business  will  represent  some  type  of  business  actually  carried 
on  among  us  to-day. 


PROTECTIONISM  359 

a  form  of  variation  which  makes  artificial  selection  possible, 
the  favorable  variations  being  those  industries  which  come 
under  the  former  description. 

No  complete  harmony  of  human  interests.  In  considering 
this  aspect  of  economic  life  too  much  has  been  usually  assumed 
as  to  the  harmony  of  human  interests.  Nothing  is  more  funda- 
mental in  economic  science  than  the  proposition  that  there  is 
an  antagonism  of  human  interests.  If  there  were  a  complete 
harmony  of  interests,  labor  and  capital  might  be  expected  to 
seek  those  industries  which  are  most  productive  from  the 
social  standpoint.  But  aside  from  the  observable  fact  that 
labor  and  capital  do  nothing  of  the  kind,  it  is  a  matter  of 
common  observation  and  experience,  confirmed  by  reflective 
analysis,  that  there  is  no  such  harmony  of  human  interests. 
One  man's  interest  is  served  by  having  the  labor  and  capital 
of  the  community  directed  in  one  line,  another's  by  having 
them  directed  in  quite  a  different  line.  More  than  that,  there 
is  great  inequality  among  individuals  in  the  power  of  giving 
direction  to  the  industry  of  the  community.  The  one  who 
owns  land  or  capital  in  addition  to  his  own  labor  power  is  in 
better  position,  other  things  being  equal,  to  determine  the 
direction  of  business  activity  than  is  the  one  who  owns  only 
his  labor  power.  We  therefore  not  only  have  the  certainty 
that  each  individual  will  try  to  direct  business  activity  in 
the  line  most  conducive  to  his  own  interests,  and  that  in 
many  cases  his  interests  will  not  harmonize  with  the  interests 
of  the  community,  but  also  the  certainty  that  the  power  to 
give  this  direction  differs  greatly  among  different  individuals. 
If  we  did  not  know  it  as  a  matter  of  direct  observation  and 
experience,  we  might  predict  from  these  premises  that  the 
business  activity  of  the  community  would  not,  in  all  cases, 
be  directed  in  the  most  productive  lines,  and  that  therefore 
it  would  be  possible,  by  some  form  of  discrimination,  to 
attract  labor  and  capital  from  the  less  productive  to  the  more 
productive  industries. 


360          PRINCIPLES  OF  POLITICAL  ECONOMY 

The  following  illustration  may  add  something  to  the  con- 
creteness  of  this  conclusion.  Let  us  suppose  that  a  certain 
tract  of  land  had  been  devoted  to  cultivation  of  a  fairly  inten- 
sive kind,  and  had  been  producing  enough  to  pay  the  wages 
of  twenty  laborers,  with  something  left  over  for  rent.  Through 
some  change  of  circumstances  the  price  of  wool  rises,  and  it  is 
found  more  profitable  to  use  the  land  for  wool-growing.  By 
turning  the  land  into  a  sheep  run,  nineteen  of  the  laborers 
may  be  dispensed  with,  and  the  saving  in  wages  would  more 
than  measure  the  difference  between  the  value  of  the  wool 
crop  and  that  of  the  present  crop,  so  that  a  larger  surplus 
would  be  left  over  as  rent.  There  is  little  doubt  that  the  land 
would  then  be  devoted  to  the  growing  of  wool.  That  would 
be  to  the  interest  of  the  landlord  and  against  the  interests  of 
the  nineteen  laborers,  but  the  landlord  is  in  a  better  position 
than  they  to  determine  the  form  of  cultivation.  There  is 
also  little  doubt  that  this  would  be  contrary  to  the  interest  of 
the  community.  Less  wealth  would  be  produced  either  for 
consumption  or  for  international  trade.  Fewer  people  could 
be  supported,  or  the  same  number  would  not  be  as  well 
supported  as  formerly. 

If  the  nineteen  men  thrown  out  of  employment  cannot  find 
places  elsewhere,  they  will  probably,  since  they  want  to  live, 
offer  their  labor  at  lower  wages,  —  enough  lower  to  enable  the 
landlord  to  get  as  much  rent  from  the  more  intensive  form  of 
cultivation  as  he  might  get  by  the  less  intensive  form.  Here 
we  have  the  somewhat  anomalous  situation  of  an  increase  in 
price  of  one  of  the  products  of  industry  causing  a  fall  in  the 
price  of  labor.  The  key  to  this  anomaly  is  found  in  the  fact 
that  what  is  cost  to  one  man  is  frequently  gain  to  another. 
Now  in  this  supposed  case  (which  is  not  altogether  a  supposed 
case)  there  is  little  doubt  that  some  form  of  discrimination  in 
favor  of  the  present  crop  and  against  wool  would  increase 
not  only  the  relative  share  of  the  produce  going  to  labor,  but 
the  absolute  amount  of  the  produce  of  the  land. 


PROTECTIONISM  361 

And  this  is  a  rule  which  works  both  ways.  In  a  community 
where  land  is  extensively  cultivated,  it  is  presumably  because 
extensive  cultivation  produces  the  best  results  from  the  stand- 
point of  the  landowner.  Any  one  of  the  following  conditions 
may  induce  him  to  change  to  intensive  cultivation  :  (i)  a  fall  in 
the  price  of  labor ;  (2)  a  fall  in  the  price  of  the  products  of 
extensive  cultivation  ;  (3)  a  rise  in  the  price  of  the  products  of 
intensive  cultivation.  There  lies  the  opportunity  for  the  pro- 
tectionist. By  some  discrimination  which  will  tend  to  increase 
the  profitableness  of  the  intensive  product,  or  decrease,  rela- 
tively at  least,  the  profitableness  of  the  extensive  product,  an 
absolutely  larger  and  more  valuable  product  might  be  created. 
This  would  support  a  larger  number  of  people,  or  support 
them  better.  They  would  have  a  larger  number  of  products 
either  for  consumption  or  for  international  trade.  Labor  and 
capital  would  have  been  attracted  from  the  less  productive  to 
the  more  productive  industry.  Since  a  protective  tariff  is  one 
means  by  which  the  relative  profitableness  of  different  indus- 
tries may  be  changed,  it  follows  that  a  protective  tariff  may 
be  a  means  of  increasing  the  total  product  of  the  industry  of 
the  community. 


PART  FOUR 


Which  has  to  do  with  the  shares  into  which  the  products  of  industry  are 
divided  and  the  awarding  of  these  shares  to  different  groups  and  classes 


363 


CHAPTER  XXX 
THE  LAW  OF  VARIABLE  PROPORTIONS 

The  problem  of  the  distribution  of  wealth  is  the  problem  of 
dividing  the  products  of  the  industry  of  the  community  among 
the  various  classes.  The  claim  of  each  class  to  a  share  of  the 
wealth  is  usually  based  upon  the  claim  that  each  has  contrib- 
uted something  to  its  production.  The  contribution  may  be 
labor,  either  mental  or  physical ;  it  may  be  capital,  or  the  results 
of  foresight  or  investing  ;  or  it  may  be  land  which  the  owner 
has  appropriated  or  otherwise  come  into  possession  of. 

The  market  value  of  services.  The  market  value  of  what 
each  has  to  offer  determines  his  share  in  the  product.  If  the 
market  value  of  labor  is  high,  the  laborer  gets  a  large  share  ;  if 
it  is  low,  he  gets  a  small  share.  The  same  is  true  of  that  which 
each  has  to  offer.  Our  first  problem  must  be,  therefore,  to 
study  the  market  value  of  each  factor,  or  agent,  of  production 
in  order  to  find  out  why  the  seller  of  each  factor  gets  a  large, 
or  a  small,  share. 

The  income  of  each  class,  however,  is  a  flow  rather  than  a 
fund  or  a  lump  sum.  The  laborer  sells  not  himself  but  the 
flow  of  productive  energy  which  he  can  exert  during  a  given 
period  of  time.  The  capitalist  sells  not  his  capital  but  the  flow 
of  utilities  which  come  from  his  capital  during  a  given  period 
of  time.  If  the  laborer  were  a  slave,  he  might  be  sold  bodily, 
and  in  that  case  he  would  bring  a  price.  The  capitalist  and 
the  landlord  may  sell  their  capital  or  their  land.  This  involves 
a  question  of  exchange  and  market  price.  When  they  sell  the 
flow  of  utilities  which  their  properties  yield,  we  have  interest 
and  rent,  which  are  questions  of  distribution.  The  following 
outline  will  indicate  the  relation  of  these  various  problems  to 

365 


366          PRINCIPLES  OF  POLITICAL  ECONOMY 

the  general  problem  of  valuation.1  For  convenience  the  flow 
of  utilities  yielded  by  the  various  factors  of  production  are 
called  services. 

f  Consumers'  goods 
Of  goods  -1  f  Land 

[  Producers'  goods  •<  Capital 


VALUATION 


[  Laborers  (under  slavery) 


f  Of  land,  yielding  rent 
Of  services  «  Of  capital,  yielding  interest 
[  Of  laborers,  earning  wages 

Why  productive  agents  are  desired.  The  reason  for  pay- 
ing for  an  agent  of  production  is  that  it  helps  to  produce 
something  which  is  desirable.  Its  value  is  derived  from  that 
of  its  product.  The  greater  its  product,  or  the  greater  its  con- 
tribution to  the  joint  product  of  a  group  of  factors,  the  greater 
its  value.  It  is  therefore  of  the  utmost  importance  that  we  find 
out,  if  such  a  thing  is  possible,  how  to  determine  the  contri- 
bution of  each  factor.  This  is  one  of  the  most  elusive  problems 
in  the  whole  field  of  economics.  The  student  is  requested  to 
study  this  problem  as  carefully  and  intensely  as  he  would  an 
intricate  problem  in  physics  or  chemistry. 

A  combination  of  the  factors  of  production  not  a  chemical 
combination.  In  Chapter  XV  we  saw  the  necessity  of  a  proper 
balance,  not  only  among  the  factors  of  production  but  also 
among  all  the  factors  of  national  life.  But  some  variation 
among  the  factors  of  production  must  always  be  allowed. 
What  constitutes  the  perfect  balance  depends  upon  a  number 
of  considerations  which  have  not  yet  been  discussed.  A  number 
of  factors  of  production,  when  used  in  combination,  are  not 
like  the  elements  in  a  chemical  reaction  or  the  colors  in  a  pic- 
ture. These  probably  permit  of  no  variation.  The  factors  of 
production  may  always  be  combined  in  different  proportions 
without  destroying  the  result.  One  can  grow  a  hundred  bushels 

1  Compare  note  by  the  author  on  "  The  Place  of  the  Theory  of  Value  in 
Economics,"  in  the  Quarterly  Journal  of  Economics,  November,  1902. 


THE  LAW  OF  VARIABLE  PROPORTIONS         367 

of  wheat  in  a  year  by  using  little  land  and  much  labor  or  by 
using  much  land  and  little  labor.  Which  is  the  more  economi- 
cal combination  will  depend  upon  the  relative  cost  of  land 
and  labor.  Where  land  is  cheap  and  labor  dear,  it  pays  to  use 
much  land  and  little  labor ;  where  land  is  dear  and  labor 
cheap,  it  pays  to  use  little  land  and  much  labor. 

In  an  actual  chemical  combination  the  various  elements  have 
to  be  combined,  apparently,  in  fixed  proportions,  without  any 
variation  whatever.  This  is  known  as  the  law  of  definite  pro- 
portions. But  in  order  to  induce  a  given  chemical  combination, 
different  substances  have  sometimes  to  be  mixed  in  considerable 
masses.  This  gives  rise  to  another  law,  which  is  as  definite  and 
as  well  understood  as  the  law  of  definite  proportions. 

The  law  of  variable  proportions.  Take,  for  instance,  the 
juvenile  experiment  of  mixing  vinegar  and  baking  soda  for 
the  purpose  of  producing  a  fizz.  The  actual  combination  of  mole- 
cules which  produces  the  gas  that  makes  the  bubbles  doubt- 
less follows  the  law  of  definite  proportions.  But  not  all  the 
materials  in  the  mixture  will  be  thus  instantly  combined.  At 
the  end  of  a  definite  period  of  time,  say  a  minute,  some  of 
the  acid  and  some  of  the  soda  will  remain  uncombined,  probably 
because  a  certain  number  of  molecules  of  each  never  happened 
to  come  in  chemical  contact  with  the  requisite  molecules  of  the 
other.  The  greater  the  quantity  of  vinegar  in  proportion  to 
the  soda,  the  greater  the  probability  that  each  molecule  of  the 
soda  will  come  in  chemical  contact  with  a  molecule  of  acid. 
Therefore,  the  greater  the  proportion  of  vinegar  to  soda,  the 
greater  the  proportion  of  the  molecules  of  soda  that  will  be 
used  in  the  formation  of  gas,  and,  conversely,  for  the  same 
reason,  the  smaller  the  proportion  of  the  molecules  of  acid  that 
will  be  used. 

Many  factors  at  work  in  combination.  There  are,  of  course, 
other  factors  in  the  problem,  such  as  the  size  and  shape  of  the 
receptacle  in  which  the  mixture  is  placed,  the  temperature  of 
the  mixture,  the  amount  of  shaking  or  stirring  to  which  it  is 


368          PRINCIPLES  OF  POLITICAL  ECONOMY 

subjected,  as  well  as  the  time  allowed  for  the  combination  to 
take  place.  Leaving  all  the  other  factors  unchanged  except 
the  one  selected  for  experimentation,  we  get  a  result  similar  to 
that  which  we  obtain  in  some  of  the  larger  economic  combina- 
tions, such  as  the  application  of  labor  to  land.  In  fact,  we  are 
here  in  contact  with  a  universal  law  which  applies  to  mixtures 
of  chemicals,  as  distinct  from  chemical  combinations,  through 
the  mixture  of  fertilizers  in  the  soil,  up  to  the  combination  of 
various  forms  of  human  talent  in  the  promotion  of  national 
greatness. 

The  manufacture  of  ether.  In  the  manufacture  of  ethers, 
alcohol  is  combined  with  acids  much  as  soda  is  combined  with 
vinegar  in  the  experiment  referred  to  above.  After  the  mixing 
has  taken  place,  only  a  limited  proportion  of  the  original  in- 
gredients is  actually  combined.  Since  alcohol  is  expensive  and 
the  acids  cheap,  it  is  found  economical  to  use  large  quantities 
of  acids  in  order  to  force  as  much  of  the  alcohol  as  possible  to 
combine.  The  acid  is  literally  massed  in  its  attack  upon  the 
alcohol,  in  order  that  no  molecule  of  the  latter  may  escape. 
In  fact,  this  phenomenon  is  explained  by  the  so-called  mass 
law.  If  alcohol  were  cheap  and  acid  expensive,  it  would  then 
be  desirable  to  force  every  molecule  of  the  acid  to  combine. 
In  order  that  as  few  as  possible  might  escape,  it  would  be  neces- 
sary to  mass  the  alcohol  in  its  attack  upon  the  acid.  An  econo- 
mist might  not  improperly  call  this  an  intensive  use  of  acid  and 
an  extensive  use  of  alcohol.  Conversely,  the  rule  actually 
followed  of  massing  the  acid  upon  the  alcohol  might  be  called 
an  intensive  use  of  alcohol  and  an  extensive  use  of  acid. 

The  results  of  massing  one  ingredient  upon  another  may  be 
illustrated  by  the  diagram  which  is  familiar  to  all  students 
of  economics. 

With  a  given  quantity  of  alcohol  let  us  mix  varying  quanti- 
ties of  acid,  which  we  shall  represent  on  the  line  OX.  The 
quantity  of  the  product,  ether,  we  shall  represent  on  the  line 
OY.  When  a  quantity  of  acid  represented  by  the  line  OC  is 


THE  LAW  OF  VARIABLE  PROPORTIONS         369 

put  into  the  mixture,  let  us  assume  that  we  get  a  quantity  of 
ether  represented  by  the  rectangle  OABC.  Twice  that  quan- 
tity of  acid  with  the  same  quantity  of  alcohol  will  increase  the 
product,  ether,  but  will  not  double  it.  That  is,  the  product 
increases  but  does  not  increase  in  proportion  to  the  acid. 
Let  us  suppose  that  a  quantity  of  acid  represented  by  the  line 
OF  produces,  with  the  other  ingredients,  a  quantity  of  ether 
represented  by  the  rectangle  ODEF.  A  third  increment  and 
a  fourth  would  still  result  in  some  additions  to  the  product,  as 
long,  perhaps,  as  any  of  the  original  quantity  of  alcohol  was 
able  to  escape  the  mass  action  of  the  acid.  Eventually  the 
point  would  be  reached  when  further  increases  of  the  acid 
would  add  nothing 
to  the  product. 


It  will  be  observed, 
however,  that  the 
addition  of  the  in- 
crement CF  to  the 
acid  did  not  add 
the  rectangle  CIEF  Diagram  A 

to  the  product.  The 

addition  to  the  product  is  the  difference  between  the  rectangle 
OA B C  and  the  rectangle  ODEF.  That  difference  is  represented 
by  the  rectangle  CGHF. 

The  marginal  product.  This  is  technically  known  as  the 
marginal  product  of  the  acid.  This  technical  term  does  not 
mean,  however,  that  even  the  product  CGfiFwas  produced  by 
the  acid  alone ;  it  merely  means  that  whatever  value  there  is 
in  the  added  product  CGHF  would  be  the  outside  limit  of  the 
value  of  the  added  ingredient  CF. 

Air  and  gasoline  in  a  carburetor.  A  problem  something  like 
this  presents  itself  in  practical  form  in  the  use  of  air  and  gaso- 
line in  an  internal-combustion  engine.  Both  are  necessary, 
but  they  may  be  mixed  in  somewhat  variable  proportions.  One 
may  use  a  rich  or  a  lean  mixture.  A  rich  mixture  is  one  rich 


K 


370          PRINCIPLES  OF  POLITICAL  ECONOMY 

in  gasoline  and  lean  in  air.  A  lean  mixture  is  one  lean  in  gaso- 
line and  rich  in  air.  Combustion  itself  is  a  chemical  process 
and  presumably  follows  the  law  of  definite  proportions  rather 
than  the  law  of  variable  proportions.  But  the  mixture  of  air 
and  gasoline  which  has  to  precede  combustion  is  not  a  chemical 
combination  and  follows  the  law  of  variable  proportions ;  that 
is  to  say,  not  all  of  both  ingredients  actually  burn,  any  more 
than  all  of  the  ingredients  in  the  manufacture  of  ether  are 
actually  combined  .  A  lean  mixture  masses  air  on  the  gasoline 
and  enables  more  of  the  latter  to  burn,  though  much  of  the 

air  is  unburned ;  a 
rich  mixture  does  not 
mass  so  much  air, 
does  not  burn  so 
much  of  the  gasoline, 
but  burns  a  larger 
proportion  of  the  air. 
If  air  were  expensive 
and  gasoline  cheap, 
L  V  x  a  rich  mixture  would 
Diaeram  B  be  more  economical. 

Since  air  costs  nothing  and  gasoline  is  expensive,  a  lean  mix- 
ture is  the  more  economical.  The  leaner  the  mixture  that  can 
be  made  to  explode,  the  greater  the  economy  of  gasoline.  It 
wastes  air,  but  that  is  not  bad  economy.  In  short,  we  try  to 
adjust  our  carburetors  so  as  to  approximate  as  nearly  as  possible 
to  the  conditions  represented  in  diagram  B. 

Let  us  assume  that  a  quantity  of  acid  represented  by  the  line 
OL  results,  under  certain  conditions  of  manufacture,  in  a  quantity 
of  ether  represented  by  the  rectangle  OJKL,  while  a  quantity 
represented  by  the  line  OQ  results,  under  similar  circumstances, 
in  a  quantity  represented  by  the  rectangle  OMNQ,  But  these 
two  rectangles  are  equal ;  that  is  to  say,  with  a  quantity  of  acid 
equal  to  OL  you  get  precisely  the  same  as  with  OQ.  In  short, 
the  additional  acid,  LQ,  is  thrown  away.  It  is  of  no  use  whatever 


N 


THE  LAW  OF  VARIABLE  PROPORTIONS         371 

in  that  particular  mixture,  and  yet,  the  acid  being  all  of  uniform 
quality,  it  is  as  good  as  any  of  the  rest.  The  average  product, 
however,  for  that  quantity  of  the  variable  ingredient  would  be 
represented  by  the  rectangle  LPNQ.  It  would  be  foolish  to  pay 
that  much  for  it,  however,  or,  if  it  cost  as  much  as  that  quan- 
tity of  ether  would  sell  for,  it  would  be  foolish  to  use  so  much. 
If,  however,  it  cost  absolutely  nothing,  it  might  pay  to  use  that 
much,  or  nearly  as  much,  in  order  to  be  sure  of  getting  the 
full  use  of  the  alcohol,  which  is  expensive. 

If  we  were  to  reduce  the  broken  lines  which  form  the  tops 
of  the  rectangles  in  the  two  diagrams,  A  and  B,  to  smooth 
curves,  we  should  get  something  like  the  following : 

As  we  increase  the 
quantity  of  one  ingre- 
dient along  the  line 
OX,  leaving  other 
factors  unchanged, 
the  average  produc- 
tivity, that  is,  the  to- 
tal product  divided  by 
the  number  of  units 

of  the  variable  ingredient,  gradually  falls.  But  as  long  as  there  is 
any  product  whatsoever  there  must  be  an  average  productivity 
per  unit  of  that  ingredient.  This  is  represented  by  the  descend- 
ing curve  YB.  But  the  marginal  productivity  falls  much  more 
rapidly  and  may  even  become  a  minus  quantity.  When  so 
much  of  this  variable  ingredient  is  used  as  to  yield  the  maxi- 
mum total  product,  and  further  additions  add  nothing  to  the 
total,  then  these  further  additions  are  said  to  have  a  marginal 
productivity  which  is  nil.  In  diagram  C  the  marginal  product  of 
varying  quantities  is  represented  by  the  line  OA.  In  some  mix- 
tures further  additions  may  actually  interfere  with  the  work  and 
reduce  the  total  product.  The  curve  YA  C  represents  the  marginal 
product  under  these  conditions.  In  other  mixtures  the  excess 
of  the  variable  ingredient  does  not  become  positively  detrimental 


3/2          PRINCIPLES  OF  POLITICAL  ECONOMY 

or  destructive,  but  merely  neutral.  In  such  cases  its  marginal 
productivity  becomes  nil  but  never  a  minus  quantity.  The  curve 
YAC  in  diagram  C,  in  order  to  represent  this  class  of  cases, 
would  have  to  be  redrawn.  It  should  never  fall  below  the  line  OX. 

Reversing  the  experiment  gives  corresponding  results.  If  now 
we  change  the  experiment  and  introduce  varying  quantities  of 
the  other  ingredient  in  the  mixture  with  a  fixed  quantity  of 
the  ingredient  which  we  have  been  considering  as  the  variable 
factor,  we  shall  get  results  which  harmonize  perfectly  with 
those  which  we  have  been  getting.  Returning  to  the  case  of 
alcohol  and  acid  in  the  making  of  ether,  let  us  start  with  a 
quantity  of  acid  represented  by  the  line  OL  in  diagram  B. 
According  to  our  assumption  as  explained  earlier,  that  quantity 
of  acid  with  the  original  quantity  of  alcohol  produced  no  more 
ether  than  a  slightly  smaller  quantity  of  acid  represented  by  the 
line  OL.  If  now  we  mix  a  quantity  of  acid  equal  to  OL  with 
enough  more  alcohol  to  bring  the  mixture  to  the  same  pro- 
portions as  in  the  original  mixture  when  OL  acid  was  used, 
the  product,  ether,  will  increase  in  exact  proportion  to  the  in- 
crease in  the  alcohol,  provided,  of  course,  the  reaction  is  not 
hindered  by  the  smallness  of  the  receptacle  or  by  some  other 
extraneous  circumstance. 

To  use,  for  example,  a  fixed  quantity  of  air  for  each  explosion, 
but  a  larger  quantity  of  gasoline,  would  require  a  larger  cylinder. 
Making  such  necessary  allowances,  we  can  say  that  if  the 
maximum  amount  of  air  in  a  gasoline  engine  is  used  with  a 
given  quantity  of  gasoline,  so  that  more  air  would  be  of  no 
advantage  whatever,  then  a  little  more  gasoline  could  be  intro- 
duced and  would  add  considerably  to  the  power.  There  being 
enough  air  in  the  mixture  to  get  the  maximum  combustion  of 
gasoline,  the  power  would  for  a  time  increase  in  proportion  to 
the  gasoline.  As  more  and  more  gasoline  is  introduced,  how- 
ever, with  a  fixed  quantity  of  air,  making  the  mixture  gradually 
richer,  a  smaller  and  smaller  proportion  of  gasoline  will  be 
burned  because  of  a  scarcity  of  air.  If  the  mixture  is  made 


THE  LAW  OF  VARIABLE  PROPORTIONS         373 

rich  enough,  a  point  will  be  reached  when  further  additions  of 
gasoline  will  add  nothing  whatever  to  the  power.  The  marginal 
productivity  of  gasoline  is  then  nil.  When  the  mixture  gets  so 
rich  that  it  will  not  explode,  it  reduces  the  power,  and  the 
marginal  productivity  of  gasoline  becomes  a  negative  quantity. 

The  marginal  product  of  each  factor  the  complement  of 
that  of  the  other.  The  marginal  productivity  of  each  factor  in 
the  combination  is,  it  will  be  observed,  the  complement  of  that 
of  the  other  factor.  When  the  proportions  are  such  that  the 
marginal  productivity  of  one  is  nil,  that  of  the  other  is  one 
hundred  per  cent  of  the  average  product ;  that  is,  the  total 
product  increases  in  exact  proportion  as  this  factor  is  increased. 
When  the  proportions  are  such  that  the  marginal  product  of 
one  factor  is  low,  that  of  the  other  is  high,  the  sum  of  the  two 
marginal  products  always  equaling  the  total  product. 

When  there  are  more  than  two  factors  in  the  compound,  the 
problem  becomes  more  complicated,  but  the  principle  is  the 
same.  In  such  a  case  it  is  better  to  treat  each  one  separately, 
regarding  all  the  others  as  a  bunch,  or  cluster,  and  thus 
treating  them  as  one.  Marshall  has  suggested  the  word  dose 
to  designate  a  group  of  factors.  Thus,  if  we  were  considering 
nitrogen,  phosphorus,  potassium,  and  all  other  factors  in  soil 
fertility,  we  could  take  all  the  factors  except,  say,  nitrogen  and 
treat  them  as  constants.  By  varying  the  nitrogen  in  the  com- 
pound, we  get  variations  in  the  crop  yields. 

Rothamsted  experiments.  Experiments  of  this  kind  have 
actually  been  carried  on  at  the  Rothamsted  Estate,  near 
London,  where  the  great  work  inaugurated  by  Sir  John  Lawes 
has  been  carried  on  for  many  years.  In  one  experiment,  for 
example,  five  plots  of  land  of  approximately  equal  fertility  were 
treated  alike  in  all  particulars  save  one.  Different  quantities 
of  nitrogen  .were  applied  in  the  fertilizer.  Forty-three  pounds 
were  applied  to  one ;  86  pounds  to  another ;  1 29  pounds  to 
another;  and  172  pounds  to  another.  The  following  table 
shows  the  results : 


374          PRINCIPLES  OF  POLITICAL  ECONOMY 

TABLE  Ii 


AVERAGE  YIELD 

GAIN  FOR 

PLOT 

FERTILIZER 

IN  BUSHELS  FOR 

43  LB.  OF 

EIGHT  YEARS 

NITROGEN 

No.  5 

Mixed  minerals  alone 

19 

No.  6 

Mixed  minerals  plus  43  Ib.  nitrogen 

27i 

8* 

No.  7 

Mixed  minerals  plus  86  Ib.  nitrogen 

35i 

71 

No.  8 

Mixed  minerals  plus  129  Ib.  nitrogen 

36| 

if 

No.  1  6 

Mixed  minerals  plus  172  Ib.  nitrogen 

37  1 

1 

According  to  this  table  the  yields  show  diminishing  returns 
for  each  successive  dose  of  43  pounds  of  nitrogen.  The  gain 
on  Plot  No.  1 6  over  Plot  No.  8  was  so  slight,  being  only  five 
eighths  of  a  bushel,  as  to  be  obviously  unprofitable.  Therefore 
this  plot  was  discontinued  at  the  end  of  eight  years,  but  the 
other  four  were  continued  for  forty-eight  years,  with  the  fol- 
lowing results  :  .  • 

TABLE  II1 


PLOT 

YIELD  IN 
BUSHELS 

GAIN  FOR  43  LB. 
NITROGEN 

No.  C  . 

I  c 

No.  6  

24 

q 

No.  7  . 

•3-1 

No.  8  

^64 

•il 

The  number  of  plots  is  too  small  to  be  finally  conclusive, 
but  so  far  as  they  go  they  show  interesting  results.  The  first 
two  doses  of  43  pounds  each,  on  Plot  No.  6  and  Plot  No.  7, 
show  constant  returns,  and  the  third  dose,  on  Plot  No.  8, 
shows  sharply  diminishing  returns.  Allowing  $6.50  as  a  fair 
price  for  43  pounds  of  nitrogen,  and  $i  as  a  fair  price  for  a 
bushel  of  wheat,  we  get  the  following  results  : 

1  These  tables  are  presented  in  the  excellent  article  by  Eugene  Davenport, 
in  Bailey's  Cyclopedia  of  American  Agriculture,  The  Macmillan  Company, 
New  York.  Compare  also  the  author's  volume  "  Principles  of  Rural  Eco- 
nomics," pp.  183-184,  Ginn  and  Company,  Boston,  1911. 


THE  LAW  OF  VARIABLE  PROPORTIONS         375 
TABLE  III 


PLOT 

YIELD  IN 
BUSHELS 

GAIN  FOR 

43  LB. 

NITROGEN 

VALUE  OF 
GAIN 

COST  OF 
GAIN 

PROFIT  OR 
Loss 

No.  ;    .    . 

I  c 

No.  6    

24. 

n 

$0 

$6.50 

$2.50  profit 

No.  7     . 

-Jl 

o 

0 

6.  so 

2.50  profit 

No.  8    

l6f 

if 

•5.7  e 

6.  so 

2.7  s  loss 

If  the  price  of  wheat  were  $2  a  bushel,  the  net  gains  would 
have  been  $11.50  on  Plot  No.  6,  $11.50  on  Plot  No.  7,  and 
$i  on  Plot  No.  8.  In  other  words,  the  last  dose  of  43  pounds 
of  nitrogen  would  have  paid  a  profit  of  $i  instead  of  a  loss 
of  $2.75.  But  if  the  price  of  wheat  had  been  50  cents  a 
bushel,  nitrogen  costing  the  same,  there  would  have  been 
a  loss  on  every  dose  of  nitrogen! 

Problems  to  be  worked  out.  These  tables  present  a  number 
of  interesting  problems  which  the  student  may  work  out  for 
himself.  Taking  Tables  II  and  III  as  a  basis,  the  following 
problems  are  suggested  : 

1.  With  43  pounds  of  nitrogen  costing  $6.50,  at  what  aver- 
age price  must  wheat  sell  in  order  that  the  farmer  may  come 
out  just  even,  with  neither  profit  nor  loss,  on  the  third  dose 
of  43  pounds  of  nitrogen  (Plot  No.  8)  ? 

2.  With  wheat  selling  at  $i  a  bushel,  at  what  price  must 
43   pounds  of   nitrogen  sell    in  order    that   the  farmer    may 
come  out  even  on  the  same  plot  with  the  same  application 
of  nitrogen  ? 

We  may,  without  doing  violence  to  language,  turn  about  and 
speak  of  "applying"  doses  of  land-plus-other-factors  to  nitro- 
gen. Let  us  start  with  129  pounds  of  nitrogen,  to  which  one 
plot,  or  dose  of  land-plus-other-factors,  is  applied,  yielding, 
according  to  Tables  II  and  III,  36|  bushels.  Adding  two 
more  plots  to  this  combination,  that  is,  spreading  our  1 29  pounds 
of  nitrogen  over  three  plots  instead  of  one,  we  get  a  much 
larger  crop.  Assuming  that  Plot  No.  6  is  exactly  equal  to  Plot 


376          PRINCIPLES  OF  POLITICAL  ECONOMY 

No.  8,  we  get  72  bushels ;  that  is,  on  Plot  No.  6  one  dose 
of  nitrogen  with  one  dose  of  land-plus-other-factors  yields 
24  bushels  according  to  our  tables.  Three  doses  of  43  pounds 
of  nitrogen  added  to  three  doses  of  land-plus-other-factors 
should  give  us  three  times  as  much,  which  makes  72  bushels. 

Since  three  doses  of  nitrogen  with  one  dose  of  land-plus- 
other-factors  yields  72,  it  follows  that  the  adding  of  two  doses 
of  land-plus-other-factors  added  35^  bushels. 

A  larger  number  of  experiments  of  the  same  kind  needed. 
We  have  not  plots  enough  to  carry  this  analysis  much  farther, 
but  it  is  probably  clear  enough  by  this  time  that  wherever,  by 
varying  the  ratios  in  which  different  factors  are  mixed  in  any 
productive  combination,  we  get  varying  results,  any  economist 
who  is  not  willing  to  consider  the  relation  of  the  variation  in 
the  factors  to  the  variation  in  the  product  is  not  much  of  an 
economist.  It  must  also  be  apparent  by  this  time  that  the  rela- 
tion between  the  variation  in  the  quantity  of  any  factor  in  the 
combination  and  the  variation  in  the  product  must  have  a  great 
deal  to  do  with  determining  the  value  of  the  factor. 

This  method  gives  the  key  to  all  correct  valuation.  Earlier 
in  the  chapter  the  term  marginal  productivity  was  applied  to 
the  variation  in  the  product  which  followed  a  minute  variation 
in  the  quantity  of  any  factor  in  the  combination.  In  each  of 
the  Tables  I,  II,  III  the  figures  in  the  third  column  would  be 
called  the  marginal  product  of  nitrogen.  Objection  has  occa- 
sionally been  raised  to  the  use  of  the  word  product  in  this 
sense.  It  is  contended  that  even  these  increments  of  product 
are  not  in  any  sense  the  exclusive  product  of  the  43  pounds  of 
nitrogen  which  were  added  in  order  to  get  that  increment,  — 
that  43  pounds  of  nitrogen,  alone  and  unrelated  to  the  other 
factors,  would  not  produce  even  the  small  increments  of  wheat 
indicated  in  the  third  columns.  No  one,  of  course,  claims  that 
they  would  or  could.  It  is  not  worth  while  to  discuss  this  or 
that  possible  meaning  of  the  word  product  or  productivity. 
The  essential  thing  to  consider  is,  How  much  could  a  farmer 


THE  LAW  OF  VARIABLE  PROPORTIONS         377 

afford  to  pay  for  a  given  quantity  of  nitrogen  to  be  used  in 
a  given  combination  ?  It  is  obvious  that  this  must  depend 
on  the  way  it  would  affect  the  crop.  How  much  more  wheat 
could  he  grow  by  using  more  nitrogen,  or  how  much  less 
would  he  grow  by  using  less  ?  There  is  no  question  more 
practical  than  that.  It  is,  moreover,  a  question  which  must 
be  raised  with  respect  to  each  and  every  factor  in  that  combi- 
nation of  factors  called  a  -farm,  or  in  any  other  business 
establishment.  It  is  in  the  answers  to  such  questions  that  we 
must  find  the  key  to  any  clear  understanding  of  the  problem 
of  the  distribution  of  wealth,  which  is,  as  pointed  out  in  the 
beginning  of  this  chapter,  the  problem  of  the  valuation  of 
the  factors  of  production. 


CHAPTER  XXXI 

THE  GENERAL  NATURE  OF  THE  WAGE  QUESTION 

How  intensely  is  a  man's  labor  desired  ?  The  price  of 
labor,  like  the  price  of  commodities,  depends  upon  how 
much  it  is  desired  in  comparison  with  other  things.  It  is 
important  in  discussing  wages,  as  in  discussing  the  price  of 
commodities,  that  we  remember  that  it  is  not  labor  in  general, 
but  specific  units  of  labor,  which  are  purchased.  The  question 
is  not  how  intense  is  the  need  or  desire  for  labor  in  general, 
nor  how  great  would  be  the  loss  if  all  labor  were  wiped  out 
of  existence.  The  question  is  how  intense  is  the  need  for  a 
given  number  of  units  of  a  given  kind  of  labor,  or  how  great 
would  be  the  loss  if  that  given  number  of  units  were  subtracted 
from  the  total  supply.  In  the  case  of  labor,  as  in  the  case 
of  commodities,  the  practical,  everyday  question,  on  the  part 
of  the  prospective  purchaser,  is,  How  much  do  I  •  need  this 
particular  article  or  the  labor  of  this  particular  man  ?  How 
much  better  off  shall  I  be  with  the  advantage  of  his  help  than 
without  it? 

The  need  for  more  labor,  rather  than  the  absolute  need  for 
labor.  It  may  be  true  that  if  there  were  no  labor  of  a  given  class, 
say  that  of  ditch  diggers,  the  community  would  suffer  terribly. 
Nevertheless,  there  may  be  so  many  ditch  diggers  that  the 
addition  of  one  to  the  total  number  would  add  very  little  to, 
and  the  subtraction  of  one  would  subtract  very  little  from,  the 
well-being  of  the  community.  When  this  is  the  case,  the  labor 
of  any  one  of  the  total  number  will  not  be  very  much  desired. 
Would-be  employers  will  be  somewhat  indifferent  to  his  offers 
to  help  and  to  his  threats  to  stop  working  or  to  emigrate. 
The  indispensable  man,  like  the  indispensable  commodity, 

378 


GENERAL  NATURE  OF  WAGE  QUESTION        379 

commands  the  high  price.  The  man  who  can  be  easily  spared, 
like  the  superfluous  commodity,  brings  the  low  price. 

This  may  be  called  the  functional  theory  of  wages,  and  it 
forms  a  part  of  the  functional  theory  of  value  which  was  out- 
lined in  a  previous  chapter.  The  function  of  a  high  price,  in 
the  economy  of  the  nation,  is  to  call  into  existence  a  larger 
supply  of  the  thing  for  which  it  is  offered.  The  function  of 
a  low  price  is  to  discourage  the  production  and  reduce  the 
supply  of  the  thing  for  which  it  is  offered.  If  a  larger  supply 
is  desired  or  needed,  a  high  price  is  the  means  of  getting  it. 
If  a  larger  supply  is  not  desired  or  needed,  a  low  price  is  the 
means  of  checking,  limiting,  or  reducing  the  supply.  Find 
out,  in  any  given  case,  how  much  better  off  a  community 
would  be,  or  thinks  it  would  be,  if  it  had  more  of  a  given 
thing  than  it  now  has,  and  you  have  a  fair  measure  of  the 
reward  which  it  could  afford,  or  thinks  it  could  afford,  to  pay 
in  order  to  get  more. 

Stated  negatively,  find  out  how  much  worse  off  the  com- 
munity would  be,  or  thinks  it  would  be,  if  it  were  to  lose 
a  unit  or  a  few  units  of  its  existing  supply  of  a  given  thing, 
and  you  have  a  measure  of  what  it  could  afford,  or  thinks  it 
could  afford,  to  pay  rather  than  to  incur  that  loss.  If  it  thinks 
it  would  make  a  great  difference  one  way  or  the  other,  a  high 
price  will  be  offered.  If  it  thinks  it  would  make  very  little 
difference,  a  low  price  will  be  offered.  This  applies  to  the 
price  of  labor  as  well  as  to  the  price  of  commodities,  and  for 
the  same  reason. 

In  the  case  of  labor,  as  in  the  case  of  commodities,  the 
community  may  be  sadly  mistaken.  It  may  fail  to  appreciate 
real  merit,  and  it  may  greatly  overrate  certain  qualities  in  either 
case.  There  is  no  going  behind  the  returns  in  a  verdict  of  this 
kind  any  more  than  in  a  popular  election. 

Again,  there  may  be  members  of  the  community  who  desire 
intensely  to  possess  a  certain  commodity,  or  to  hire  a  certain 
kind  of  labor,  but  who  have  not  the  wherewithal  to  purchase  or 


380          PRINCIPLES  OF  POLITICAL  ECONOMY 

hire  it.  They  will  therefore  have  little  influence  on  the  price 
or  the  wages.  This  impecunious  condition  may  be  due  to  the 
fact  that  others  have  no  great  desire  for  the  labor  or  the  prod- 
ucts of  the  persons  in  question.  In  that  case  the  community 
does  not  value  their  services  very  highly,  and  therefore  their 
desires  have  little  influence  on  the  market  for  other  things  or 
other  services. 

Productive  labor  is  wanted  because  of  its  product.  Our  next 
task  is  to  find  out  what  determines  how  much  the  labor  of  any 
particular  man  or  group  of  men  is  wanted.  In  the  simplest 
possible  case,  —  that  of  a  laborer  who,  without  any  help  from 
anybody  else,  produces  a  complete  article,  —  his  labor  is  needed 
just  as  much  as,  and  no  more  than,  the  article  itself  is  needed. 
The  price  of  the  article,  then,  is  his  reward.  If  he  is  not  satis- 
fied with  his  income,  he  must  find  fault  with  the  price  which 
the  consumer  pays  for  the  product,  for  he  gets  the  whole 
price.  This,  however,  is  a  case  so  simple  as  to  be  very  excep- 
tional. Very  few  finished  products  are  produced  by  the  labor 
of  a  single  person.  One  who  goes  out  into  the  woods  and 
gathers  nuts  or  berries,  carries  them  in  vessels  which  he  has 
himself  improvised,  and  sells  them  directly  to  consumers  may 
come  under  this  class.  The  woodsman  who  goes  into  the  pri- 
meval forest  and  chops  wood  will  at  least  have  an  ax  ;  this 
ax  is  likely  to  have  been  made  by  somebody  else.  He  will 
probably  also  need  a  team,  which  may  have  been  grown  or  pro- 
duced by  somebody  else.  While  it  is  not  strictly  true  that  in 
a  case  of  this  kind  the  finished  product,  firewood,  is  produced 
by  the  labor  of  one  man,  still  the  problem  in  distribution  is 
fairly  simple.  If  the  woodman  has  paid  a  fair  price  for  his 
ax,  the  question  of  distribution  as  between  him  and  the  ax- 
maker  is  settled  and  does  not  need  to  bother  us  any  more. 
If  he  likewise  pays  a  fair  price  for  his  team  and  wagon,  the 
problem  of  distribution  as  between  himself  and  the  horse 
breeder  and  wagon  maker  is  also  settled  and  need  not  bother 
us  again.  Since  he  has  paid  for  his  tools,  the  total  value  of 


GENERAL  NATURE  OF  WAGE  QUESTION        381 

the  wood  which  he  cuts  and  hauls  to  town  is  his  reward,  and 
there  is  no  further  problem  in  distribution.  But  the  further 
we  proceed  with  our  study,  the  more  complicated  the  problem 
will  become,  for  we  shall  find  that  in  the  great  majority  of  cases 
the  product  is  the  joint  product  of  a  large  number  of  people. 

Goods  generally  produced  by  the  joint  labor  of  a  num- 
ber of  persons.  We  are  sometimes  told  that  most  goods  are 
socially  produced.  This  is  a  rather  impressionistic  statement; 
it  may  do  no  harm,  but  it  is  liable  to  misinterpretation.  It 
would  be  better  to  say  that  most  goods  are  produced  by  the 
joint  efforts  of  several  persons.  The  total  reward  which  can 
go  to  all  of  them  cannot  in  the  long  run  exceed  the  total 
value  of  the  finished  product.  This  must  be  divided  among 
all  those  who  have  participated  in  its  production.  The  price 
of  the  loaf  of  bread  must  reward  all  those  who  have  had  any 
part  in  its  production,  including  the  baker,  the  miller,  the 
various  transportation  agencies,  and  the  farmer,  as  well  as 
the  manufacturers  of  the  farmer's,  the  baker's,  and  the  miller's 
tools,  and  so  on  back  to  the  lumbermen  and  the  miners  who 
extracted  the  raw  material  out  of  which  the  tools  were  made. 

The  successive  division  of  labor  does  not  create  a  very 
difficult  problem  in  distribution.  We  find  here  that  we  are  in 
contact  with  what,  in  a  previous  chapter,  has  been  called  the 
division  of  labor.  This  is,  as  already  pointed  out,  of  two 
kinds  :  contemporaneous  and  successive.  We  have  the  suc- 
cessive division  among  the  farmer,  the  miller,  the  railroad, 
and  the  baker,  since,  one  after  the  other,  they  work  upon  the 
same  material.  We  have  an  example  of  the  contemporaneous 
division  of  labor  in  the  case  of  the  mill  owner  and  his  em- 
ployees of  various  kinds,  the  farmer  and  his  hired  men,  the 
railroad  company  and  its  employees,  and  so  on.  The  problem 
of  distributing  the  price  of  the  finished  product  among  those 
who  work  upon  the  raw  material  in  regular  succession  is 
simply  a  problem  in  the  price  of  commodities.  Thus,  the 
reward  of  the  farming  group  comes  to  them  in  the  form  of 


382          PRINCIPLES  OF  POLITICAL  ECONOMY 

the  price  of  wheat.  This  price  must  then  be  distributed  among 
the  contemporaneous  workers  on  the  farm,  that  is,  the  farmer 
himself  and  his  hired  men.  The  difference  between  the  price 
of  wheat  and  the  price  of  flour  and  its  by-products  must  fur- 
nish the  reward  for  the  milling  group,  and  the  difference 
between  the  price  of  flour  and  the  price  of  the  bread  must 
furnish  the  total  reward  for  the  baking  group. 

All  this  is  fairly  simple  and  leads  to  no  serious  social  problem. 
Of  course  the  farmer  would  like  to  get  a  higher  price  for  his 
wheat,  and  the  miller  would  like  to  get  it  at  a  lower  price, 
and  each  one  may  from  time  to  time  accuse  the  other  of  try- 
ing to  manipulate  the  price ;  but  it  is  a  question  of  market 
price,  and  therefore  society  in  general  has  not  taken  up  the 
quarrel.  Similarly,  the  miller  would  like  to  get  a  higher  price 
for  his  flour,  and  the  baker  would  like  to  get  it  at  a  lower 
price.  This  conflict  of  interests,  however,  does  not  now  create 
what  is  known  as  a  social  problem.  The  commodity  market  is 
supposed  to  take  care  of  it,  and  social  reformers  in  general 
have  not  exercised  themselves  to  any  great  extent  on  the 
subject.  Occasionally,  of  course,  someone  is  acccused  of  corner- 
ing wheat  or  manipulating  the  price  of  flour.  Similarly,  the 
baker  would  like  not  only  to  get  his  flour  cheaper,  but  also 
to  sell  his  bread  at  a  higher  price.  This,  again,  is  taken  care 
of  by  the  commodity  market. 

When  bakers  are  accused  of  manipulating  price,  as  is  not 
infrequently  done  by  dissatisfied  consumers,  no  great  social 
problem  is  supposed  to  be  created.  There  have  been  historic 
occasions,  of  course,  when  mobs  of  irate  consumers  have 
hanged  bakers  to  their  own  lamp-posts  because  the  price  of 
bread  was  higher  than  the  consumer  liked  to  pay.  They  have 
not  always  stopped  to  consider  how  much  the  baker  had  to 
pay  for  his  flour,  or  the  miller  for  his  wheat,  or  how  hard  a 
time  the  farmer  has  had  in  growing  his  wheat,  owing  to  bad 
weather  and  pests  of  various  kinds.  All  that  the  irate  con- 
sumers realized  was  that  the  price  of  bread  was  higher  than 


GENERAL  NATURE  OF  WAGE  QUESTION        383 

they  were  accustomed  to  paying,  and  the  unfortunate  baker 
was  the  only  one  within  their  reach  upon  whom  they  could 
wreak  their  vengeance. 

The  division  of  the  product  among  contemporaneous  workers 
the  difficult  problem.  The  great  social  problem  of  to-day,  so 
far  as  it  relates  to  the  distribution  of  wealth,  is  the  problem  of 
distributing  the  price  of  the  product  among  the  contempora- 
neous workers.  Of  the  total  price  of  wheat,  how  much  should 
go  to  the  landowner  (if  he  is  a  different  man  from  the  farmer), 
how  much  to  the  farmer,  how  much  to  the  laborer,  how  much 
to  the  capitalist  (if  he  is  a  different  man  from  the  farmer)  ?  Or, 
again,  of  the  total  spread  between  the  price  of  wheat  and  the 
price  of  flour,  which  furnishes  the  total  reward  to  the  milling 
group,  how  much  should  go  to  the  capitalist,  how  much  to  the 
owner  of  the  mill  site,  how  much  to  the  manager,  and  how 
much  to  the  various  types  of  laborers  ?  And  so  on  through 
the  transportation  groups  and  the  baking  groups,  the  difficult 
problem  is  always  that  of  the  distribution  of  the  total  earnings 
of  the  group  among  the  contemporaneous  workers  within  it. 

Not  much  headway  can  ever  be  made  in  the  study  of  this 
problem  unless  we  hold  carefully  in  mind  the  law  of  variable 
proportions  as  explained  in  the  last  chapter.  When  it  is  sug- 
gested, for  example,  that  each  factor  of  production  should  be 
paid  for  in  proportion  to  its  contribution  to  the  product,  any 
student  who  does  not  understand  the  law  of  variable  propor- 
tions is  likely  to  say  that  there  is  no  way  of  finding  out  what 
each  factor  contributes.  He  will  say,  for  example,  that  it  is 
like  trying  to  find  out  how  much  of  the  welding  is  done  by 
the  anvil  and  how  much  by  the  hammer,  or  how  much  of  the 
cutting  by  the  upper  and  how  much  by  the  lower  blade  of  the 
scissors.  To  use  this  comparison  is  to  show  that  one  does  not 
understand  the  problem.  If  one  blade  of  the  scissors  were  a 
little  longer  than  the  other,  it  would  not  require  any  so-called 
metaphysical  or  theoretical  reasoning  to  see  that  the  scissors 
might  be  improved  by  lengthening  the  shorter  blade.  If  two 


384          PRINCIPLES  OF  POLITICAL  ECONOMY 

workmen  were  to  offer  their  services,  one  to  lengthen  the 
longer  blade  and  one  to  lengthen  the  shorter  blade,  it  would 
not  take  much  of  a  theoretician  to  decide  which  workman  it 
would  be  better  to  hire.  The  workman  who  would  lengthen 
the  shorter  blade  would  add  somewhat  more  to  .the  cutting 
power  of  the  scissors  than  the  workman  who  would  lengthen 
the  longer  blade. 

Most  economic  problems,  as  pointed  out  many  times  already 
in  this  volume,  relate  to  the  problems  of  more  or  less,  of  im- 
provement or  deterioration,  of  readjustment  of  existing  equip- 
ment, organization,  etc.  If  the  blacksmith  were  ever  called 
upon  to  decide  whether  to  get  along  with  an  anvil  without 
any  hammer,  or  with  hammers  without  any  anvil,  there  might 
be  some  point  to  the  comparison.  The  question  which  he  has 
to  decide  is  how  to  balance  up  his  equipment  so  as  to  have 
hammers  and  anvils  well  adapted  to  one  another.  If  he  were 
to  find  that  he  could  improve  his  work  slightly  by  having 
another  hammer,  but  that  he  could  gain  nothing  by  buying 
another  anvil,  there  is  not  much  doubt  that  he  would  be  more 
likely  to  spend  money  on  hammers  than  on  anvils.  He  would 
not  spend  much  time  puzzling  over  the  abstract  question  as  to 
whether  hammers  or  anvils  were  the  more  productive.  Simi- 
larly, if  a  farmer  found  that  he  could  increase  his  crop  more 
by  having  extra  help  than  by  having  more  land,  he  would  be 
more  likely  to  offer  wages  to  someone  than  to  offer  rent  to 
someone  else.  If  farmers  generally  felt  that"  way  about  it, 
wages  would  be  high  and  rent  low.  Under  the  opposite 
conditions  rent  would  be  high  and  wages  low. 

Under  the  law  of  variable  proportions,  or  that  special  phase 
of  it  known  as  the  law  of  diminishing  returns  from  land,  it  is 
actually  found  that  in  a  community  where  there  is  an  abundance 
of  good  land  but  a  scarcity  of  labor  to  work  it,  one  or  more 
laborers  added  to  the  existing  number  makes  a  considerable 
difference  in  the  crop.  That  is  a  sufficient  reason  for  paying 
high  wages  to  labor.  Additional  laborers  are  very  much  needed  ; 


GENERAL  NATURE  OF  WAGE  QUESTION        385 

the  agricultural  situation  would  be  very  much  improved  by 
having  more  laborers  and  would  be  very  much  injured  if  any 
were  lost.  The  question  of  more  laborers  or  of  fewer  laborers 
is  one  of  considerable  importance. 

On  the  other  hand,  where  land  is  so  abundant  and  laborers 
so  few  that  it  is  difficult  to  cultivate  the  existing  land,  it  would 
not  be  of  much  advantage  to  production  to  have  a  few  more 
acres,  nor  much  of  a  disadvantage  to  have  a  few  less.  The 
question  of  more  or  less  is  not,  in  this  case,  very  important. 
This  is  the  question  which  presents  itself  to  the  practical  farmers. 
The  question  as  to  which  is  absolutely  more  important,  land  or 
labor,  is  a  question  which  occurs  only  to  armchair  philosophers. 
This  would  be  in  all  respects  like  the  question  as  to  which  does 
more  of  the  cutting,  the  upper  or  the  lower  blade  of  the  scissors. 

Shares  generally  divided  into  wages,  rent,  interest,  and  profit. 
It  simplifies  the  problem  somewhat  to  classify  those  who  take 
part  in  the  contemporaneous  division  of  labor  according  to  the 
functions  which  they  are  supposed  to  perform.  It  is  customary 
to  divide  them  into  four  main  classes.  The  first  class  is  made  up 
of  the  laborers,  who  work  either  with  their  hands  or  with  their 
heads,  and  receive  their  share  in  the  form  of  wages  or  salaries 
(for  the  sake  of  simplicity,  salaries  are,  in  this  chapter,  in 
eluded  under  wages) ;  the  second  class  is  made  up  of  the  land- 
owners, who  furnish  the  land  and  receive  rent ;  the  third  class 
is  made  up  of  the  capitalists,  who  supply  the  capital  and  receive 
a  reward  in  the  form  of  interest ;  and  the  fourth  class  is  made 
up  of  the  independent  business  men,  who  undertake  to  assemble 
all  the  other  factors,  —  who  take  the  chief  risks  of  the  enterprise, 
and  receive  whatever  is  left  over  after  all  the  others  are  paid, 
and  call  it  profits. 

Any  or  all  of  these  functions  may  be  performed  by,  and  any 
or  all  of  these  shares  may  go  to,  the  same  man.  In  many  small 
enterprises  the  independent  business  man  does  his  own  work  and 
is  therefore  a  laborer,  owns  his  own  land  and  is  therefore  his 
own  landlord,  and  furnishes  his  own  capital  and  is  therefore 


386       PRINCIPLES  OF  POLITICAL  ECONOMY 

his  own  capitalist.  A  very  large  proportion  of  the  total  busi- 
ness of  the  nation  is  done  in  this  way.  The  typical  farm  in 
the  northern  half  of  the  country  comes  under  this  description, 
as  do  also  many  small  shops  and  stores  in  country  towns,  and 
a  few  even  in  the  larger  cities.  But  even  the  farmer,  as  well 
as  any  other  business  man  who  does  a  part  of  his  own  work, 
may  hire  additional  help  and  pay  wages,  though  getting  wages 
for  himself.  He  may  also  rent  additional  land,  though  owning 
some  land  of  his  own  and  getting  rent  for  it.  He  may  borrow 
additional  capital,  though  owning  some  capital  of  his  own  and 
getting  interest  on  it.  In  fact,  we  can  find  every  possible  varia- 
tion, from  the  enterprise  where  every  function  is  performed  by 
the  same  man  to  that  where  no  one  performs  more  than  a 
single  function.  An  example  of  the  latter  would  be  the  enter- 
prise where  laborers  do  all  the  work  and  receive  nothing  but 
wages  or  salaries,  where  someone  else  is  the  landowner,  and 
furnishes  nothing  but  land  and  receives  nothing  but  rent,  where 
another  man,  or  group  of  men,  furnishes  nothing  but  capital  and 
receives  nothing  but  interest,  and  where  still  another  man,  or 
group  of  men,  assumes  the  risks  of  the  enterprise,  invests  the 
borrowed  capital  on  the  rented  land,  hires  the  labor,  and  under- 
takes to  find  sale  for  the  products.  In  this  chapter  we  are 
concerned  with  the  income  which  pays  for  the  function  of 
the  laborer.  Wages  are  the  price  which  is  paid  to  call  forth  the 
necessary  quantity  of  productive  labor. 

We  may  say  in  general  that  when  one  factor  of  production 
is  oversupplied  in  proportion  to  the  others  which  need  to  be 
combined  with  it,  the  question  of  getting  more  of  it,  or  even 
of  maintaining  the  existing  supply,  becomes  unimportant.  Ac- 
cordingly not  much  will  be  paid  in  order  to  get  more  of  it, 
or  even  to  hold  the  existing  supply.  But  when  any  factor  is 
undersupplied  in  proportion  to  the  others  which  have  to  be  com- 
bined with  it,  the  question  of  getting  more  of  it,  or  of  holding 
the  existing  supply,  becomes  very  important.  Accordingly  a 
high  price  will  be  offered  for  it. 


GENERAL  NATURE  OF  WAGE  QUESTION   387 

This  principle  applies  not  simply  to  land,  labor,  and  capital, 
but  to  the  different  kinds  of  each.  If  there  is  a  scarcity  of 
skilled  labor  in  proportion  to  the  unskilled  labor  which  has  to 
be  combined  with  it,  it  becomes  very  important  to  get  more 
skilled  labor,  or  at  least  to  keep  some  of  the  existing  supply 
from  going  elsewhere.  In  that  case  a  high  wage  will  be  offered 
for  skilled  labor.  Under  the  same  conditions  there  is,  of  course, 
a  large  supply  of  unskilled  labor  in  proportion  to  the  skilled. 
It  is  therefore  not  very  important  that  there  should  be  more 
unskilled  labor,  nor  even  that  the  existing  supply  should  be 
kept  from  diminishing.  Not  much  is  likely  to  be  paid,  under 
such  conditions,  for  unskilled  labor. 

The  next  question  is,  What  determines  the  relative  supply 
of  the  various  factors  of  production  ? 


CHAPTER  XXXII 

WHAT  DETERMINES  THE  RATE  OF  WAGES? 

Causes  of  differences  of  wages  in  different  occupations.  Let  us 
consider,  first,  the  causes  of  the  difference  of  wages  in  different 
occupations.  If,  in  order  to  get  efficient  production,  it  is  found 
necessary  to  have  a  high  degree  of  specialization,  many  differ- 
ent kinds  of  skill  will  be  found  in  the  same  establishment, 
each  kind  contributing  its  share  toward  the  production  of  the 
same  product.  Men  possessing  these  different  kinds  of  skill 
will  be  needed  in  slightly  variable,  but  fairly  definite,  proportions. 
In  the  production  of  cloth,  for  example,  spinners  and  weavers 
will  be  needed  in  fairly  definite  proportions.  If  by  any  accident 
it  could  happen  that  for  a  period  of  time  there  were  more 
spinners  than  were  necessary  to  supply  yarn  for  the  weavers,1 
the  value  of  each  spinner  would  be  considerably  reduced. 
Under  these  conditions,  if  they  could  exist,  it  would  be  literally 
true  that  a  few  less  spinners  would  be  little  loss,  provided  the 
remaining  spinners  could  still  supply  all  the  yarn  the  weavers 
could  use.  On  the  other  hand,  the  labor  of  each  weaver  would 
be  of  considerable  value. 

Since  there  would  not  be  weavers  enough  to  use  all  the  yarn 
that  could  be  produced,  one  less  weaver  would  reduce  the  total 
production  of  cloth,  and  one  more  weaver  would  add  to  the 
total  production,  assuming  that  machinery  and  room  were  avail- 
able. Under  these  conditions  there  would  grow  up  in  any  free 
community  a  difference  in  wages  in  favor  of  the  weavers  and 
against  the  spinners.  This  would  be  called  the  law  of  supply 
and  demand,  but  this  law  rests  back  on  certain  fundamental 
advantages  and  disadvantages.  The  addition  to  the  total  output 

1  Compare  Chapter  XVIII. 
388 


WHAT  DETERMINES  THE  RATE  OF  WAGES?     389 

of  cloth  which  would  result  from  an  increase  in  the  number 
of  weavers  would  really  be  much  greater  than  the  addition 
which  would  result  from  an  equal  increase  in  the  number  of 
spinners.  This  would  be  a  sufficient  reason  why  a  higher  price 
should  be  offered  for  the  labor  of  weavers  than  for  that  of 
spinners.  In  the  absence  of  compulsion,  that  would  be  the 
only  way  of  attracting  more  weavers  and  fewer  spinners. 

Of  course  this  condition  would  soon  correct  itself.  If  the 
wages  of  the  weavers  were  allowed  to  go  up  and  the  wages  of 
the  spinners  to  go  down,  some  of  the  spinners  would  have  an 
excellent  reason  for  changing  their  occupation.  If  they  could 
not  easily  do  so,  the  oncoming  generation  of  laborers,  who 
have  to  choose  between  the  occupation  of  weaver  and  that  of 
spinner,  would  be  attracted  into  the  one  where  the  wages  were 
higher,  and  thus  restore  the  equilibrium.  But  if  wages  were 
not  allowed  to  readjust  themselves,  and,  through  some  compul- 
sion on  the  part  of  the  government  or  some  other  agency,  all 
mills  were  forced  to  pay  as  high  wages  for  spinners  as  for 
weavers,  and  to  hire  all  who  applied,  then  there  would  be  no 
reason  why  the  oncoming  generation  should  go  into  the  occu- 
pation where  they  were  most  needed.  They  would  simply 
choose  the  one  where  the  work  was  most  agreeable.  There  is, 
therefore,  a  genuine  social  utility  to  be  achieved  by  the  differ- 
ence of  wages  which  would  grow  up  under  the  law  of  supply 
and  demand.  It  would  tend  to  attract  laborers  into  the  occupa- 
tion where  more  men  were  needed  and  to  discourage  them 
from  entering  the  occupation  where  more  men  were  not  needed. 
This  will  be  found  to  be  the  fundamental  reason  why  wages 
are  as  a  matter  of  fact  higher  in  some  occupations  than  in  others. 
Where  the  ordinary  processes  of  bargaining  are  not  interfered 
with,  wages  tend  to  be  high  in  those  occupations  where  more 
men  are  needed,  and  needed  badly,  and  low  in  those  occupa- 
tions where  more  men  are  not  needed,  or  not  needed  badly. 
The  function  of  these  differences  of  wages  is  to  restore  the 
equilibrium  between  different  occupations. 


390          PRINCIPLES  OF  POLITICAL  ECONOMY 

Cost  of  acquiring  skill.  If  there  is  some  permanent  obstacle 
in  the  way  of  a  free  choice  of  occupations,  there  may  be  a  per- 
manent difference  in  the  wages  in  different  occupations,  based 
upon  an  undersupply  of  labor  in  one  and  an  oversupply  in 
another.  If,  for  example,  a  certain  occupation  requires  a  kind 
of  skill  which  is  not  widely  distributed  or  easily  acquired, 
whereas  another  occupation  requires  a  kind  of  skill  which  mul- 
titudes of  people  possess  or  can  easily  acquire,  there  is  likely 
to  be  a  permanent  undersupply  of  the  one  kind  of  labor  and 
a  permanent  oversupply,  at  least  relatively,  of  the  other.  The 
cost  of  training  or  the  difficulty  and  irksomeness  of  the  neces- 
sary study  and  practice  will  serve  to  limit  the  number  of  people 
who  succeed  in  entering  the  highly  skilled  occupations. 

In  this  respect  the  cost  of  acquiring  the  necessary  skill  acts 
very  much  as  the  cost  of  producing  a  material  commodity.  As 
the  price  of  the  material  commodity  must  be  high  enough  to 
cover  the  cost  or  to  overcome  the  disinclination  to  the  work 
of  production,  so  the  wages  of  labor  in  a  highly  skilled  occu- 
pation must  be  high  enough  to  pay  the  cost  of  acquiring  the 
skill  or  to  overcome  whatever  disinclination  there  may  be  to  the 
preliminary  work  of  study  and  practice.  If  this  cost  is  high, 
the  wages  must  be  correspondingly  high.  If  the  cost  is  very 
low,  so  that  practically  no  one  is  deterred  from  entering  the 
occupation,  the  wages  will  be  correspondingly  low. 

Some  skill  is  absolutely  limited.  There  may,  however,  be 
certain  kinds  of  skill  which  are  so  scarce  as  to  be  almost  in- 
capable of  being  increased.  Certain  kinds  of  work  may  require 
a  man  of  genius  rather  than  a  man  of  training.  But  in  most 
cases  it  will  be  found  to  be  a  matter  of  training.  An  indefinite 
number  of  men  could  be  trained  for  almost  any  occupation  if 
the  wages  were  only  high  enough  to  furnish  a  sufficient  in- 
ducement. This,  however,  will  depend  somewhat  upon  the 
opportunities  for  education  and  training.  Under  a  system  of 
free  public  education  the  cost  of  training  is  greatly  reduced  and 
should  naturally  greatly  increase  the  supply  of  highly  skilled 


WHAT  DETERMINES  THE  RATE  OF  WAGES?     391 


labor.  Where  the  money  cost  of  education  is  eliminated,  the 
only  cost  remaining  is  the  irksomeness  of  hard  study.  Those  to 
whom  this  irksomeness  is  very  slight  will  naturally  be  attracted 
into  the  more  highly  paid  occupations.  There  may,  however, 
be  artificial  restrictions  in  the  way  of  entering  certain  well- 
paid  occupations.  If  a  group  of  laborers  in  one  of  those  few 
occupations  where  something  resembling  the  apprenticeship 
still  prevails,  would  limit  the  number  of  apprentices,  that 
would  of  course  limit  the  number  of  laborers  who  could  ac- 
quire skill  enough  to  follow  the  occupation.  In  other  cases 
the  policy  of  the  closed  shop  might  be  carried  to  such  an 
extreme  as  to  reduce  the  supply  of  labor  in  the  given  occu- 
pation, and  thus  prevent  the  readjustment  of  the  labor  supply 
to  meet  the  demand.  The  tendency  of  freedom,  however,  is  to 
encourage  the  automatic  readjustment  of  the  supply  of  labor 
to  the  demand. 

f  Fatigue 

Disinclination  to      Long  hours 
work  because  of  1  Loss  of  opportunity  for 

[      pleasure 

Disinclination  to  f  A  high  standard  of  living 
multiply  because  •<  Late  marriages 
of  [  Birth  control 


CAUSES 

OF  THE 

SCARCITY 

OF  LABOR 


In  the  unskilled 
trades 


In  the  skilled 
trades 


{Women 
Children 
Men  of  other  races 

Restriction  of  immigration 
Encouragement  of  emigration 

("War 
Destruction  of  life  through  •<  Pestilence 

{_  Famine 
Rarity  of  genius 
Expenses  of  education 
Disinclination  to  study 
Reduction  of  number  of  apprentices 
Closed  shop 


392          PRINCIPLES  OF  POLITICAL  ECONOMY 

These  are  the  principal  factors  which  determine  the  excess 
in  wages  of  the  skilled  trades  and  occupations  and  the  learned 
professions  over  and  above  those  paid  in  what  are  known  as 
the  unskilled  occupations.  By  the  unskilled  occupations  is 
meant,  however,  those  which  require  a  kind  of  skill  which 
practically  everybody  can  acquire  without  much  special  study. 
There  is  skill  involved  in  the  handling  of  a  spade  or  a  wood- 
man's ax,  as  any  inexperienced  person  will  find  if  he  tries  to 
use  one  or  the  other  effectively ;  but  it  is  a  kind  of  skill  which 
large  numbers  of  people  acquire  easily,  and  therefore  the  supply 
of  such  skill  is  so  great  as  to  keep  wages  down  pretty  close  to 
what  is  known  as  the  standard  of  living.  We  have,  therefore, 
the  problem  of  finding  out  what  determines  the  wages  of  this 
general  mass  of  unskilled  labor.  What  is  there  here  which 
corresponds  to  the  cost  of  producing  a  material  commodity  or 
the  cost  of  acquiring  the  skill  required  in  one  of  the  well-paid 
occupations  ?  The  factors  which  take  the  place  of  cost  of  pro- 
duction here  are,  first,  the  disinclination  to  work,  and,  second, 
the  disinclination  to  multiply. 

Scarcity  of  unskilled  labor.  Among  the  vigorous  Euro- 
pean and  American  stocks  the  disinclination  to  work  is  not 
so  very  great.  Nevertheless,  there  is  an  appreciable  quantity  of 
labor  which  is  chronically  withdrawn  from  productive  work  by 
reason  of  this  factor.  That  part  of  the  leisure  class  which  is 
made  up  of  people  who  have  inherited,  married,  or  otherwise 
come  into  possession  of  sufficient  wealth  to  enable  them  to 
live  without  work,  show  this  disinclination  rather  clearly. 
There  are  also  the  chronic  loafers,  the  tramps,  and  the 
nomadic  element  among  us,  who  show  a  strong  disinclination 
to  work,  and  only  do  so  under  strong  temptation. 

The  disinclination  to  multiply  is  unfortunately  strongest 
among  those  who  possess  the  most  forethought.  Those  who 
live  only  in  the  present,  who  have  no  regrets  for  yesterday 
and  no  fears  for  to-morrow,  generally  give  way  to  their  primal 
impulses  and  multiply  almost  as  rapidly  as  is  physiologically 


WHAT  DETERMINES  THE  RATE  OF  WAGES?     393 

possible.  Those,  however,  who  look  to  the  future,  not  only 
of  themselves  but  of  their  children,  who  foresee  the  disadvan- 
tages which  their  children  will  suffer  if  they  are  insufficiently 
nourished  or  inadequately  educated,  generally  have  smaller 
families  than  are  physiologically  possible.  The  multiplication 
of  numbers  among  such  people  becomes  in  part  a  moral  process 
instead  of  a  purely  animal  process.  Family  building  takes  the 
place  of  spawning.  Marriages  of  those  who  take  thought  for 
the  future  are  postponed  until  they  are  able  to  support  and 
educate  their  children. 

The  group  of  motives  and  factors  which  serve  to  hold  the 
procreative  instincts  in  check  are  generally  called  by  the  name 
of  the  standard  of  living.  This  is  a  somewhat  technical  term 
in  economics  and  requires  some  careful  explanation. 

Meaning  of  the  standard  of  living.  Technically  the  term 
standard  of  living  means  the  number  of  desires  which,  in  the 
average  person  of  the  class  in  question,  take  precedence  over 
that  group  of  desires  which  result  in  the  multiplication  of  num- 
bers. For  purposes  of  discussion  we  will  call  the  latter  group 
of  desires  the  domestic  instincts.  When  the  domestic  instincts 
act  powerfully  and  without  opposing  motives  to  hold  them  in 
check,  the  individual  will  undertake  the  support  of  a  family 
before  he  is  assured  of  a  sufficient  income  to  satisfy  any  but 
the  most  elementary  desires.  Under  these  conditions  he  is  said 
to  have  a  low  standard  of  living.  In  his  case  there  are  very 
few  other  desires  which  take  precedence  over  the  domestic 
instincts.  The  individual  of  .whom  that  is  true  will  accordingly 
marry  and  undertake  the  support  of  a  family  as  soon  as  he  has 
sufficient  income  to  satisfy  that  other  small  group  of  desires. 
In  other  cases  a  large  number  of  other  desires  take  precedence 
over  the  domestic  instincts.  An  individual  of  whom  that  can 
be  said  will  not  marry  and  undertake  the  support  of  a  family 
until  he  feels  reasonably  certain  of  being  able  to  satisfy  all 
these  other  desires.  He  is  said  to  have  a  high  standard  of 
living ;  that  is,  an  expensive  standard. 


394          PRINCIPLES  OF  POLITICAL  ECONOMY 

If  we  can  imagine  a  community  to  which  immigrants  from 
the  outside  do  not  come,  and  in  which  the  average  unskilled 
laborer  has  a  high  standard  of  living,  we  will  have  a  com- 
munity in  which  the  average  laborer  will  not  marry  and  under- 
take the  support  of  a  family  until  he  is  sure  of  wages  high 
enough  to  satisfy  a  large  number  of  desires.  If  the  average 
individual,  however,  has  a  low  standard  of  living,  he  will  marry 
and  undertake  the  support  of  a  family  on  low  wages ;  that  is, 
wages  that  are  just  high  enough  to  secure  him  the  means  of 
satisfying  a  small  group  of  desires.  If  the  unskilled  laborers 
of  the  community  have  a  high  standard  of  living,  the  average 
age  of  marriage  will  be  a  little  higher  and  the  average  size  of 
the  family  a  little  smaller,  so  that  the  rate  of  multiplication  will 
be  materially  slower  than  would  be  the  case  if  they  had  a  low 
standard  of  living.  The  rate  of  multiplication  being  slower,  the 
oncoming  supply  of  labor  is  less,  and  in  the  succeeding  genera- 
tions laborers  will  thus  be  able,  through  the  smaller  supply,  to 
continue  to  get  high  wages.  If  wages  are  low  to  begin  with,  they 
will  refuse  to  marry  or  will  defer  marriage  to  such  a  late  age 
as  to  reduce  the  supply  of  labor  and  thus  force  wages  up  to  a 
level  which  will  enable  them  to  maintain  their  standard.  If  the 
standard  of  living,  however,  is  low,  and  the  rate  of  multiplica- 
tion correspondingly  high,  wages  tend  to  continue  low.  Even 
if  wages  were  temporarily  high,  unless  the  standard  of  living 
should  rise  quickly,  the  rate  of  multiplication  would  so  increase 
through  early  marriages  and  large  families  as  to  oversupply 
the  labor  market  and  force  wages  down  again  until  they  were 
just  sufficient  to  maintain  the  low  standard  of  living. 

Standard  of  living  affects  the  price  of  labor  as  cost  of  pro- 
duction affects  the  price  of  a  commodity.  From  the  foregoing 
discussion  it  will  be  seen  that  the  standard  of  living  affects 
the  wages  of  the  general  mass  of  unskilled  labor  precisely  in 
the  same  way  as  the  cost  of  producing  a  material  commodity 
affects  its  price.  Wages  must  be  sufficient  to  overcome  the  dis- 
inclination to  marry  and  produce  families.  This  disinclination, 


WHAT  DETERMINES  THE  RATE  OF  WAGES?     395 

however,  is  the  joint  product  of  a  number  of  conflicting 
desires.  In  an  elementary  sense  there  is  a  strong  inclination 
to  marry  rather  than  a  disinclination,  but  the  inclination  to 
marry  is  held  in  check  by  the  desire  of  the  individual  for  con- 
sumers' goods  of  his  own.  If  he  realizes  that,  with  a  family 
to  support,  he  will  have  a  little  less  money  to  spend  on  him- 
self, or  that,  if  his  family  is  too  large,  he  will  have  less  for 
each  one  of  them  and  may  not  be  able  to  educate  them,  such 
considerations  will  create  a  disinclination  which  may  more  than 
balance  the  inclination  toward  marriage.  A  real  safeguard 
against  low  wages,  therefore,  is  a  high  standard  of  living,  which 
will  check  somewhat  the  tendency  toward  early  marriages  and 
large  families.  How  far  this  should  go  is  always  a  serious 
question.  No  one  advocates  so  low  a  standard  as  would  cause 
multiplication  to  take  place  as  rapidly  as  is  physiologically  pos- 
sible. If  that  were  the  case,  marriages  would  take  place  at  the 
age  of  puberty,  and  women  would  be  continually  engaged  in 
the  functions  of  motherhood  as  long  as  childbearing  was 
possible.  Nobody  would  favor  that.  Everyone  favors  some 
kind  of  a  standard  of  living  and  some  postponement  of  mar- 
riage. It  is  only  a  question  as  to  how  high  a  standard  and 
how  much  postponement  is  desirable. 

The  law  of  population.  This  brings  us  to  the  great  law  of 
population,  which  has  generally  been  associated  with  the  name 
of  Malthus.  The  law  which  Malthus  worked  out  and  which 
has  never  been  successfully  refuted,  though  many  attempts 
have  been  made,  may  be  briefly  stated  as  follows  : 

1.  Every  species  of  plant  and  animal  has  the  physiological 
power  to  multiply  faster  than  its  means  of  subsistence  will  per- 
mit.   Subsistence  is  the  factor  which  actually  limits  numbers. 

2.  The  physiological  power  of  human  increase   is  also  so 
great  that  if  it  should  operate  without  moral  or  social  restraints 
of  any  kind,  it  would  carry  population  to  such  limits  that  vice 
or  misery  or  both  would  begin  to  thin  out  the  surplus  popula- 
tion and  thus  operate  as  a  check  upon  further  increase. 


396          PRINCIPLES  OF  POLITICAL  ECONOMY 

3.  Owing  to  the  law  of  diminishing  returns,  a  larger  number 
of  people  cannot,  in  any  given  state  of  civilization  and  the 
industrial  arts,  be  so  well  provided  for  from  the  produce  of  a 
restricted  area  as  a  smaller  number  can. 

4.  There   is  a  strong  natural   instinct  which   inclines  the 
members  of  our  species  to  the  multiplication  of  numbers,  and 
unless  this  is  counteracted  by  other  motives,  it  will  lead  to  an 
increase  of  population  beyond  the  limits  where  comfortable 
subsistence  is  possible. 

5.  This  natural  instinct  is,  however,  opposed  and  held  in 
check  by  several  contrary  motives,  not  the  least  important  of 
which  is  the  desire  for  the  goods  which  one  has  been  accus- 
tomed to  consume,  coupled  with  the  perception  on  the  part 
of  each  head,  or  would-be  head,  of  a  family  that  a  larger  num- 
ber of  children  means  a  smaller  share  of  the  necessaries,  com- 
forts, and  luxuries  of  life  for  each  one,  and  this  keeps  the  rate 
of  increase  far  below  that  which  is  physiologically  possible. 

6.  How  rigidly  the  increase  of  numbers  is  held  in  check  by 
this  motive  depends  upon  the  ideas  of  the  people  as  to  what 
is  essential,  in  the  way  of  incomes,  to  their  happiness,  —  in 
other  words,  upon  their  standard  of  living.    It  is  the  standard 
of  living,  therefore,  which  determines  the  rate  of  increase  of 
population,  given  the  amount  of  wealth  and  the  possibilities  of 
production.    It  plays  the  same  part  in  determining  the  supply 
of  labor  which  the  cost  of  producing  commodities  plays  in 
determining  their  supply. 

Refinement  of  the  law  of  population.  While  this  general 
law  has  never  been  successfully  refuted,  and  is  accepted  by 
every  economist  of  any  standing,  some  refinements  have  been 
found  necessary.  For  example,  it  makes  a  great  deal  of  differ- 
ence in  what  stratum  of  society  the  increase  in  population 
takes  place.  There  might  be  such  a  thing  as  a  considerable 
increase  in  the  total  population  which  would  result  in  a  con- 
siderable increase  in  the  rate  of  wages  of  unskilled  labor.  If 
we  could  double  or  treble  or  quadruple  the  number  of  people 


WHAT  DETERMINES  THE  RATE  OF  WAGES?     397 

in  what  are  known  as  the  employing  classes  (that  is,  the  pro- 
fessional men  and,  more  particularly,  the  successful  entrepre- 
neurs and  independent  business  men),  the  competition  among 
these  business  men  would  take  several  forms.  In  order  to 
equip  and  man  their  establishments  they  would  have  to  bid 
against  one  another  to  get  labor  and  also  to  sell  their  products. 
This  would  tend  to  bring  up  the  price  of  labor  and  to  bring 
down  the  price  of  products, — in  other  words,  to  leave  a  narrower 
margin  of  profits  on  which  business  men  would  have  to  live. 
For  example,  recent  immigrants  into  the  Philippine  Islands 
from  America  have  not  been  unskilled  laborers  but  skilled 
laborers,  engineers,  technicians,  and  business  men.  This  has 
added  somewhat  to  the  population  of  the  Philippines,  but  at  the 
same  time  it  has  increased  the  demand  for  unskilled  laborers 
and  has  therefore  tended  to  improve  their  condition.  Whether 
the  increase  in  the  higher  economic  grades  comes  through 
immigration  or  higher  birth  rate  or  better  systems  of  education, 
they  all  produce  much  the  same  result. 

Effect  of  immigration.  We  began  our  discussion  of  the 
effect  of  the  standard  of  living  by  assuming  a  community  to 
which  no  immigrants  came.  However  high  the  standard  of 
living  of  the  native  laborers,  or  however  strong  the  tendency  of 
the  educational  and  social  system  to  raise  the  standard  of  living, 
if  large  numbers  of  immigrants  with  a  low  standard  kept  com- 
ing in,  it  would  keep  the  standard  down  to  a  low  level.  At 
any  rate  the  oversupply  of  unskilled  labor  would  tend  to  keep 
wages  down.  Their  coming  tends  to  make  business  conditions 
easier  for  men  who  need  to  employ  unskilled  labor,  but  to 
make  conditions  very  much  harder  for  the  unskilled  laborers 
who  are  already  there.  If,  however,  the  immigrants  resemble 
those  Americans  who  go  to  the  Philippine  Islands  (that  is,  if 
they  belong  to  the  skilled,  the  professional,  and  the  employing 
classes),  they  tend  to  make  conditions  easier  for  the  unskilled 
laborers  but  harder  for  the  skilled,  the  professional,  and  the 
employing  classes  who  are  already  there. 


398          PRINCIPLES  OF  POLITICAL  ECONOMY 

Noncompeting  groups.  This  brings  in  the  principle  known 
by  various  names,  such  as  the  principle  of  noncompeting 
groups  or  the  principle  of  joint  demand.  In  the  case  of  mate- 
rial commodities  it  sometimes  happens  that  two  or  more  articles 
have  to  be  combined  to  supply  the  same  demand,  —  such  as 
sugar  and  cranberries,  bread  and  butter,  etc.  If  sugar  is  so 
scarce  and  so  high  that  people  cannot  afford  to  buy  it,  there 
will  be  less  demand  for  cranberries  ;  but  if  sugar  is  abundant 
and  cheap,  so  that  everybody  can  afford  to  buy  it,  there  will  be 
an  increased  demand  for  cranberries.  In  the  field  of  produc- 
tion we  get  much  better  illustrations  than  in  the  field  of  con- 
sumption. It  frequently  happens  that  several  different  kinds 
of  material  have  to  be  combined  in  the  making  of  a  single 
product,1  —  coal  and  iron  ore,  for  example,  in  the  making 
of  steel.  If  coal  were  scarce  and  very  expensive,  and  other 
kinds  of  fuel  likewise,  the  best  iron  ore  in  the  world  would  be 
of  very  little  use  and  would  have  to  sell,  if  it  sold  at  all,  at  a  very 
low  price.  With  cheap  and  abundant  coal  the  value  of  ore  beds 
tends  to  rise.  The  same  principle  applies  to  different  types  of 
labor.  Managerial  skill,  technical  skill,  and  manual  labor  have 
to  be  combined  in  the  production  of  many  manufactures.  If 
there  were  no  manual  labor  to  be  had,  managerial  skill  and 
technical  skill  would  be  of  very  little  use ;  with  an  abundant 
and  cheap  supply  of  manual  labor  these  other  forms  of  skill 
become  enormously  valuable  to  their  possessors.  Conversely, 
with  no  managerial  and  technical  skill  to  go  with  it,  manual 
labor  would  be  worth  very  little  in  our  industries ;  with  an 
abundance  of  managerial  labor  and  technical  skill  large  quanti- 
ties of  manual  labor  can  be  utilized  so  that  many  industries  can 
start.  The  first  and  most  important  refinement  to  be  made  in 
the  doctrine  of  population,  therefore,  is  to  point  out  that  the 
question  of  absolute  number  is  not  the  only  question  involved, 
but  the  question  of  the  occupational  distribution  of  numbers. 
When  the  increase  in  numbers  takes  place  among  the  unskilled 

1  Compare  the  law  of  variable  proportions  as  presented  in  a  previous  chapter. 


WHAT  DETERMINES  THE  RATE  OF  WAGES?      399 

laborers,  it  works  to  their  disadvantage  but  to  the  advantage  of 
those  who  belong  in  noncompeting  groups,  say  the  technically 
skilled  and  those  possessing  managing  ability  ;  but  when  the 
increase  in  numbers  takes  place  in  the  higher  economic  classes, 
it  works  to  the  advantage  of  the  unskilled  laborer. 

Summary.    The    discussion   thus   far   may   be  summarized 
as  follows : 

1 .  The  wages  of  any  person  will  depend  upon  how  much  his 
labor  is  desired.    The  wages  of  any  class  will  depend  upon 
how  important  it  is  thought  to  be  that  there  should  be  more 
laborers  of  that  class,  or  that  there  should  not  be  any  less. 
High  wages  indicate  a  strong  desire  and  low  wages  indicate  a 
weak  desire  to  have  more  of  a  certain  kind  of  work  done. 

2.  Different  kinds  of  labor  usually  have  to  be  combined  in 
fairly  definite   but   somewhat  variable   proportions.     If   there 
happens  to  be  more  of  a  certain  kind  than  will  combine  satisfac- 
torily with  the  existing  supply  of  the  other  necessary  kinds, 
the  oversupplied  kind  will  not  be  strongly  desired.     There 
will  be  no  great  need  for  more  of  it,  and  therefore  no  strong 
reason  for  paying  high  wages.    The  kind  of  labor,  however, 
which  is  undersupplied  will  be  much  more  needed.  There  will 
be  a  strong  reason  for  desiring  more  of  it,  and  the  only  way, 
in  a  free  society,  to  get  more  of  it  is  to  offer  high  wages. 

3.  Labor  which  requires  a  kind  of  skill  that  is  difficult  to 
acquire  will  usually  be  scarce,   relatively  to  the  need  for  it. 
Wages  must  be  high  enough  to  induce  men  to  make  the  neces- 
sary effort  in  order  to  fit  themselves  for  the  work. 

4.  Unskilled  labor  is  usually  abundant,  being  limited  only 
by  the  disinclination  to  work  and  the  standard  of  living  or  the 
cost  of  bringing  up  children.    Where  the  cost  is  high,  or  the 
unwillingness  great,  wages  must  be  high  enough  to  induce  men 
to  marry  and  bring  up  children.    When  the  cost  is  low  and 
there  is  very  little  unwillingness  to  overcome,  wages  may  be 
low  because  men  will  bring  up  children  on  very  low  wages 
and  thus  keep  the  supply  of  labor  intact. 


CHAPTER  XXXIII 

THE  ORGANIZATION  OF  LABORERS 

Comparative  advantages  in  bargaining.  It  has  long  been 
recognized  that  in  the  ordinary  bargaining  process  between 
laborers  and  their  employers,  the  laborers  are  at  a  disadvan- 
tage. The  reasons  why  they  are  at  a  disadvantage  have  been 
variously  stated.  It  is  argued,  for  example,  that  the  capitalist 
can  wait  longer  than  the  laboring  man,  and  thus  wear  the 
laboring  man  out  and  force  him  to  give  in  and  accept  the 
capitalist's  terms.  The  capitalist,  it  is  said,  having  an  accu- 
mulation of  wealth,  can  live  on  that  accumulation.  There  is 
doubtless  something  in  this  argument,  though  it  is  easy  to 
exaggerate  it.  If  the  capitalist's  accumulation  is  in  the  form 
of  buildings  and  machinery,  it  is  difficult  to  see  how  he  can 
live  on  these  things.  He  might  borrow  money  on  the  basis 
of  the  security  which  they  furnish,  and  with  this  borrowed 
money  buy  consumers'  goods. 

It  is  not  so  much  the  fact  that  he  is  a  capitalist  as  it  is  the 
fact  that  he  has  greater  borrowing  facility  that  gives  him  this 
advantage.  If,  instead  of  owning  capital,  he  owned  consumers' 
goods  in  considerable  quantities,  —  if  he  owned,  for  example, 
his  own  house,  if  he  had  insurance  policies  or  deposits  in  the 
savings  bank,  —  he  would  have  the  same  or  even  greater  waiting 
power  than  he  has  when  he  owns  capital  of  equal  commercial 
value.  It  is  therefore  frequently  argued  that  one  remedy  for 
this  situation  is  for  the  laborer  himself,  as  far  as  possible,  to 
acquire  his  own  home,  life-insurance  policies,  and  deposits  in 
savings  banks.  This  would  help,  at  any  rate,  to  give  him  the 
power  to  wait,  and  would  thus  help  to  even  up  the  advan- 
tages in  bargaining.  But  the  objection  to  this  is  the  simple 

400 


THE  ORGANIZATION  OF  LABORERS  401 

observed  fact  that  the  laborers  have  less  property  of  any  kind 
than  their  employers  ;  otherwise  they  would  not  be  laborers. 
This  being  the  fact,  it  does  not  help  much  to  point  out  what 
the  laborer  might  do  if  the  facts  were  otherwise. 

Another  reason  given  for  the  disadvantage  of  the  laborer 
in  the  bargaining  process  is  that  he  is  usually  less  skillful  in 
the  matter  of  bargaining  than  his  employer.  His  expertness  is 
more  likely  to  consist  of  manual  skill  than  of  skill  in  bargain- 
ing. The  entrepreneur  is  peculiarly  a  bargaining  person.  He 
literally  bargains  for  everything.  If  he  borrows  capital,  if  he 
rents  land,  if  he  buys  raw  materials,  secures  transportation 
rates,  and  hires  labor,  and  also  organizes  a  selling  department, 
—  every  part  of  his  work  has  to  do  with  bargaining.  He  be- 
comes, therefore,  the  bargainer  par  excellence.  Those  whose 
expertness  lies  in  other  directions  are  therefore  at  a  disad- 
vantage when  they  come  to  deal  with  him.  This  argument 
is  undoubtedly  correct  as  far  as  it  goes. 

Employers  are  few,  but  laborers  are  numerous.  The  third 
fact,  however,  which  militates  to  the  disadvantage  of  the 
laborer  and  the  advantage  of  the  employer  is  that  laborers 
are  numerous  and  employers  are  few.  There  is  more  competi- 
tion among  laborers  for  jobs  than  among  employers  for  men. 
Wherever  this  fact  does  not  exist,  there  is  no  great  advantage 
on  the  part  of  the  employer.  One  conspicuous  example  would 
be  that  of  domestic  servants.  The  employer  in  this  case 
doubtless  has  more  power  to  wait  than  the  maid.  The  em- 
ployer may,  on  the  average,  be  somewhat  more  intelligent  than 
the  maid.  Nevertheless  there  is  no  great  advantage  in  bar- 
gaining, for  the  simple  reason  that  there  are  approximately  as 
many  employers  as  there  are  employees.  Observation  seems 
to  show  that,  in  this  part  of  the  country  at  least,  it  is  far  more 
difficult  for  an  employer  to  find  a  maid  than  for  a  maid  to  find 
an  employer.  When  they  meet  to  arrange  terms,  there  is  no 
visible  advantage  on  the  side  of  the  employer  or  disadvantage 
on  the  side  of  the  employee.  In  fact,  it  sometimes  appears 


402          PRINCIPLES  OF  POLITICAL  ECONOMY 

that  the  advantage  and  disadvantage  are  of  the  opposite  kind. 
There  are  at  least  a  reasonable  number  of  cases  where  the 
employee  is  very  independent  and  must  be  placated  by  an 
almost  obsequious  attitude  on  the  part  of  the  employer.  A  mul- 
titude of  other  illustrations  might  be  given,  which  in  the  aggre- 
gate seem  rather  important,  though  as  compared  with  the  number 
of  cases  where  the  employer  is  at  an  advantage  and  the  em- 
ployee is  at  a  disadvantage  they  are  probably  insignificant. 

It  appears,  therefore,  that  the  fundamental  and  permanent 
remedy  for  the  laborer's  disadvantage  in  bargaining  would  be 
such  a  reduction  of  the  number  of  laborers  and  such  an  in- 
crease of  the  number  of  employers  as  would  give  the  laborer 
at  least  an  equal  advantage  in  the  bargaining  process.  This 
remedy,  however,  like  all  fundamental  and  permanent  remedies, 
is  slow  and  difficult  to  bring  about.  It  is  slow  in  the  sense 
that  it  would  take  a  generation  or  so  to  bring  it  about ;  it  is 
difficult,  not  for  economic  but  for  political  and  social  reasons. 
Economically  it  is  perfectly  easy ;  politically  it  is  difficult 
simply  because  it  would  be  difficult  to  get  a  majority  of  the 
voters  to  vote  for  such  a  policy.  It  may  take  several  genera- 
tions before  a  majority  vote  could  be  secured  for  a  constructive 
policy  of  this  kind.  Meanwhile  the  existing  laborers  would 
still  be  at  a  disadvantage  and  in  need  of  relief.  It  would  be 
cold  comfort  to  them  to  point  out  that  future  generations  of 
laborers  may  be  exceedingly  well  off  if  the  right  policy  is 
adopted.  Therefore  they  are  inclined  to  take  matters  into  their 
own  hands  and  adopt  a  more  speedy  remedy,  even  though  it 
be  less  fundamental  and  less  permanent. 

Collective  bargaining.  This  remedy  is  that  which  is  known 
as  collective  bargaining  as  against  individual  bargaining.  In  a 
trade  where  laborers  are  oversupplied,  each  individual  laborer 
is  in  a  weak  position,  because  he  can  easily  be  spared.  He  is 
almost  superfluous  ;  he  is  certainly  not  indispensable.  If  he 
stops  working  or  leaves  the  community,  he  will  scarcely  be 
missed.  Industry  will  go  on  approximately  as  well  without  him 


THE  ORGANIZATION  OF  LABORERS  403 

as  with  him.  Because  there  is  a  superfluity  of  labor  his  place 
can  easily  be  filled.  Under  such  conditions  his  bargaining 
power  is  very  weak;  he  is  practically  compelled  to  take  what- 
ever terms  are  offered  to  him.  His  kind  of  labor  as  a  whole, 
however,  may  be  absolutely  indispensable.  While  he  as  an 
individual  could  be  spared  without  much  inconvenience,  all 
the  members  of  his  trade  are  absolutely  indispensable  when 
considered  as  a  whole.  If  they  were  all  to  stop  work,  business 
would  have  to  stop  ;  if  they  were  all  to  emigrate,  the  whole 
business  in  which  they  were  engaged  would  be  permanently 
destroyed. 

The  group  may  be  indispensable,  while  the  individual  could 
easily  be  spared.  The  fundamental  principle  involved  in  the 
trade-union  policy  of  the  present  is  the  substitution  of  the 
indispensable  group  as  a  bargaining  unit  for  the  dispensable 
individual.  Since  the  group  as  a  whole  is  indispensable  to 
industry,  if  they  can  bargain  as  a  whole  the  laborers  are  in  a 
strong  position.  As  a  group  they  cannot  possibly  be  spared. 
The  difficulty,  however,  has  always  been  to  hold  the  group 
together  and  get  them  to  bargain  absolutely  as  an  indispen- 
sable group  and  to  refrain  from  making  individual  bargains 
independently  of  group  action. 

The  trade  union.  This  underlying  principle  has  given  rise 
to  one  of  the  largest  social  movements  of  modern  times ; 
namely,  the  organization  of  laborers.  Several  types  of  organi- 
zation, however,  have  entered  the  field,  and  there  is  still  some 
rivalry  among  them.  In  the  first  place,  there  is  the  trade 
union  pure  and  simple ;  this  is  an  organization  of  the  men 
who  ply  the  same  trade ;  that  is,  the  men  whose  work  is  of  the 
same  kind.  The  Brotherhood  of  Locomotive  Engineers  is  an 
example  of  this  kind  of  organization. 

The  industrial  union.  In  the  second  place,  there  is  the  in- 
dustrial union,  which  includes  all  the  laborers  plying  various 
trades  who  are  engaged  in  the  same  general  line  of  industry. 
The  United  Mine  Workers  of  America  is  one  example  of  this 


404          PRINCIPLES  OF  POLITICAL  ECONOMY 

type  of  organization ;  the  Brotherhood  of  Railroad  Trainmen 
of  America,  which  attempts  to  take  in  all  the  railroad  workers, 
is  another. 

The  labor  union.  A  third  type  of  organization  is  what  may 
be  called  the  labor  union,  which  attempts  to  organize  all 
laborers,  of  whatever  trade  or  occupation  and  in  whatever  in- 
dustry they  may  be  engaged.  The  Knights  of  Labor  form  an 
organization  of  this  type  and  lately  the  Industrial  Workers 
of  the  World  have  attempted  a  similar  type  of  organization. 

The  federation  of  trade  unions.  The  trade  union  seems  in 
recent  years  to  have  been  somewhat  stronger  than  either  the 
industrial  union  or  the  labor  union,  but  it  has  felt  the  need 
of  some  larger  and  more  nearly  universal  type  of  organization. 
This  has  been  secured  by  the  federation  of  trade  unions  into  a 
national  organization  known  as  the  American  Federation  of 
Labor.  This  type  of  organization  recognizes  that  each  trade 
has  certain  special  and  peculiar  interests  of  its  own  and  there- 
fore has  a  special  reason  for  organizing  as  a  trade.  This  is  a 
principle  which  seems  to  be  ignored  by  the  labor  union  espe- 
cially. By  organizing  the  special  and  peculiar  interests  of  each 
trade  the  federation  becomes  stronger  at  this  most  vital  point. 
By  federating  the  different  trades  for  the  furthering  of  the 
interests  which  are  common  to  all  it  becomes  stronger  at 
another  important  point ;  namely,  the  need  of  concerted  action 
on  a  nation-wide  scale. 

The  attempt  to  ignore  the  special  interests  of  each  trade 
and  to  unite  all  workers,  of  whatever  trade  or  industry,  into  one 
universal,  undifferentiated  organization,  has  had  certain  ideal- 
istic features  which  make  a  strong  appeal  to  men  of  idealistic 
temperament.  There  is  the  attempt  to  ignore  any  possible 
rivalry  of  interests  among  different  classes  of  laboring  men. 
While  this  sounds  attractive,  it  hardly  accords  with  the  observed 
facts.  It  is  perhaps  a  little  more  humanitarian  in  its  philos- 
ophy but  a  little  less  effective  in  its  methods  of  work.  It 
might  be  compared  to  an  attempt  to  create  a  unified  nation  by 


THE  ORGANIZATION  OF  LABORERS  405 

ignoring  all  local  interests  and  internal  conflicts,  whereas  the 
federation  idea  might  be  compared  to  a  system  of  government 
which  would  recognize  local  and  state  interests,  and  allow  a 
certain  amount  of  self-government  to  the  local  units,  but  which 
would  unite  them  all  under  a  national  government  for  the 
carrying  out  of  national  aims. 

Necessity  of  controlling  the  supply  of  labor  in  its  own 
market.  Like  all  attempts  in  all  fields  to  bargain  to  better 
advantage  for  the  sale  of  either  a  commodity  or  a  service,  an 
organization  of  laborers  must  get  control  of  the  supply  of  the 
service  which  it  is  trying  to  sell.  This  leads  to  the  policy  of 
the  closed  shop.  That  is  the  policy  under  which  none  but 
members  of  the  organization  are  to  be  employed  in  a  given 
shop  or  series  of  shops.  If  any  considerable  number  of  out- 
siders are  permitted  to  work  in  these  shops,  they  will  of  course 
bargain  independently  and  be  in  a  weak  position.  That  very 
fact  also  tends  to  weaken  the  power  of  the  organization  in 
the  bargaining  process.  Unless  the  organization  can  control 
the  supply  of  labor  which  is  permitted  to  work  in  a  given 
trade,  —  can  withdraw  them  as  a  body  or  put  them  back  as  a 
body,  —  it  will  find  itself  unable  to  secure  advantageous  terms. 
If,  for  example,  there  were  so  many  nonunion  laborers  avail- 
able as  to  make  the  employer  more  or  less  indifferent  as  to 
whether  the  members  of  the  union  worked  as  a  body  or  with- 
drew as  a  body,  he  would  not  be  likely  to  pay  much  attention 
to  the  demands  of  the  union.  If  he  knew  that,  even  though 
the  union  as  a  body  withdrew  from  his  shop,  he  could  easily 
fill  places  with  nonunion  men,  the  bargaining  power  of  the 
union  would  at  once  be  destroyed. 

The  closed  shop.  An  absolutely  closed  shop  is  very  difficult 
to  maintain  when  there  is  a  surplus  of  laborers  available  for  a 
given  occupation.  So  long,  for  example,  as  indefinite  numbers 
of  foreign-born  laborers  can  be  had  for  the  recruiting  of  the 
ranks  of  any  trade,  nothing  but  the  most  drastic  measures  on 
the  part  of  the  organization  of  laborers  can  preserve  its  control. 


406          PRINCIPLES  OF  POLITICAL  ECONOMY 

It  is  sometimes  necessary,  from  their  point  of  view,  to  use  a 
good  deal  of  persuasion,  and  this  persuasion  is  sometimes  of  a 
rather  severe  nature  and  often  virtually  amounts  to  compulsion. 

The  strike.  The  strike  has  become  one  of  the  drastic  methods 
through  which  an  organization  of  laborers  may  enforce  its  con- 
trol over  the  labor  supply.  Theoretically  the  strike  is  merely 
the  suspension  of  work  by  the  laborers  of  a  given  trade  or 
group  of  trades.  If  there  were  no  waiting  list  and  no  avail- 
able mass  of  laborers  from  which  to  fill  the  shops  which  they 
have  vacated,  a  mere  quiet  suspension  of  work  would  be  all 
that  would  be  involved  in  a  strike.  This,  however,  is  seldom 
the  situation.  There  is  generally  such  an  oversupply  of  labor, 
especially  of  the  unskilled  kinds,  as  to  force  the  strikers  to  do 
something  else  besides  the  mere  suspension  of  work.  They 
must  manage  somehow  to  keep  others  from  taking  their  places. 
This  may  take  the  form  of  peaceful  picketing  and  persuasion ; 
it  may  take  the  form  of  threats ;  and,  in  extreme  cases,  it  may 
even  take  the  form  of  violence  and  terrorism.  It  is  to  be  re- 
membered, however,  that  threats,  violence,  and  terrorism  are 
only  necessary,  even  from  the  laborer's  point  of  view,  when 
there  is  an  oversupply  of  labor  available  for  the  jobs  of  the 
strikers.  The  ultimate  cure  for  this  situation  is  that  which  was 
suggested  earlier  in  this  chapter,  —  such  a  thinning  out  of  the 
number  of  laborers,  especially  in  the  unskilled  occupations,  as 
to  reduce  the  number  of  men  to  an  approximate  equality  with 
the  number  of  jobs. 

In  justification  of  the  strike,  even  when  accompanied  by 
threats  and  violence,  it  is  sometimes  euphemistically  stated  that 
the  laboring  man  has  a  right  to  his  job  and  no  other  laboring 
man  has  a  right  to  take  it  away  from  him.  Or,  as  it  is  some- 
times put,  the  labor  unionist's  eleventh  commandment  is, 
Thou  shalt  not  steal  thy  neighbor's  job.  This,  however,  is  not 
quite  complete ;  it  really  should  read,  Thou  shalt  not  steal  thy 
neighbor's  job  unless  he  is  a  nonunion  man,  and  in  that  case 
thou  shalt  go  after  it  with  a  club. 


THE  ORGANIZATION  OF  LABORERS  407 

Numbers  make  for  weakness  in  bargaining  but  for  strength 
in  fighting  and  voting.  One  large  fact  which  complicates 
the  whole  problem  of  the  organization  of  laborers  and  their 
methods  is  that  those  who,  because  of  their  numbers,  are  weak 
in  the  bargaining  process  become,  by  virtue  of  those  same 
numbers,  strong  in  the  making  of  public  opinion  and  in  the 
election  of  candidates  for  office.  Roughly  speaking,  one  may 
say  that  the  more  people  there  are  of  a  certain  individual  type, 
the  weaker  they  are  in  the  process  of  individual  bargaining 
but  the  stronger  they  are  in  making  public  opinion  and  con- 
trolling elections.  It  is  pretty  certain,  therefore,  that  they  will 
use  their  strength  in  controlling  public  opinion  and  politics  to 
compensate  for  their  weakness  in  the  bargaining  process. 
Whatever  our  views  on  the  purely  ethical  aspects  of  such  ques- 
tions as  the  closed  shop,  the  strike,  picketing,  threats,  and  vio- 
lence, we  must  realize  once  and  for  all  that  in  a  republic,  where 
majorities  control,  there  is  absolutely  nothing  to  be  done  about 
it.  Those  who  realize  that  they  are  weak  in  the  process  of 
peaceful  individual  bargaining  but  strong  in  other  ways  can  be 
depended  upon  to  use  that  strength  to  their  own  advantage. 
On  the  other  hand,  those  who,  because  their  numbers  are  few, 
are  very  strong  in  the  process  of  peaceful  and  individual  bar- 
gaining, must  realize  that  politically  they  are  very  weak,  since 
they  have  very  few  votes.  It  would  be  as  futile,  therefore,  to 
expect  that,  when  there  is  an  oversupply  of  labor,  the  laboring 
men  will  go  on  indefinitely,  bargaining  individually  for  jobs 
and  accepting  the  disadvantages  under  which  they  labor  and 
refraining  from  using  the  strength  of  numbers  in  their  own 
interests,  as  to  expect  that  the  tides  should  cease  to  rise  and 
fall  or  the  winds  to  blow. 

When  a  numerous  class  realizes  that  its  numbers  count 
against  it  in  bargaining  but  for  it  in  fighting  and  voting,  it  is 
pretty  certain,  sooner  or  later,  to  try  to  win  back,  by  fighting  or 
by  voting,  what  it  has  lost  in  bargaining.  Therefore  there 
are  two  very  good  reasons  why  we  should  try  to  maintain  a 


408          PRINCIPLES  OF  POLITICAL  ECONOMY 

balanced  population.  By  a  well-balanced  population  is  meant  a 
population  in  which,  among  other  things,  each  occupational 
group  is  no  more  numerous  than  is  necessary  to  combine  with 
other  occupational  groups.  If,  for  example,  there  are  no  more 
spinners  than  are  needed  to  supply  yarn  for  the  weavers,  no 
more  of  both  than  are  required  to  combine  satisfactorily  with 
other  groups,  no  more  unskilled  laborers  than  are  necessary 
to  work  in  combination  with  the  skilled  laborers,  no  more  of 
both  than  are  necessary  to  work  in  combination  with  salesmen, 
accountants,  managers,  etc.,  the  population  is  well  balanced  so 
far  as  these  groups  are  concerned.  When  this  is  the  case,  no 
group  will  be  at  a  disadvantage  in  the  bargaining  process.  That 
is  one  reason.  The  other  is  that  no  group  would  have  the 
motive  or  the  power  to  win  back,  by  fighting  or  by  voting, 
what  it  was  losing  by  bargaining.  Such  a  balancing  of  our 
population  would  eliminate  the  more-  acute  phases  of  our 
labor  problem. 


CHAPTER  XXXIV 

THE  RENT  OF  LAND 

Rent  the  price  paid  for  the  use  of  land.  The  rent  of  land 
originally  meant  the  price  paid  for  its  use  during  a  given 
period  of  time.  Its  meaning  is  now  extended  to  cover  the 
income  which  the  owner  derives  from  it,  whether  he  uses  it 
himself  or  lets  it  out  to  someone  else.  The  selling  price  of 
land  is  the  price  paid  as  a  lump  sum  for  its  permanent  pos- 
session, which  includes  its  use  through  all  future  time.  Its 
value  is  the  present  estimate  of  all  its  future  utilities,  whether 
they  are  sold  or  kept  by  the  present  owner  and  his  heirs. 
There  is  thus  a  very  close  connection  between  the  value,  or 
price,  of  land,  on  the  one  hand,  and  its  rent,  on  the  other.  The 
rent  is  the  value,  or  the  price,  of  the  flow  of  utilities  which  it 
yields  during  a  given  period  of  time,  such  as  a  month  or  a 
year.  Both  the  value  and  the  rent  of  land  come  under  the 
general  law  of  value ;  both  are  determined  by  utility  and 
scarcity,  as  is  the  case  with  all  forms  of  value. 

Why  rent  is  paid.  The  utility  of  land  is  of  various  kinds 
and  degrees.  In  some  cases  land  yields  its  utilities  directly, 
and  thus  is  a  consumers'  good,  or  at  least  resembles  con- 
sumers' goods  in  this  respect.  Parks,  pleasure  grounds,  and 
residence  sites  yield  their  utilities  in  this  way  instead  of  yield- 
ing tangible  products.  In  other  cases  land  yields  its  utilities 
indirectly ;  that  is,  it  produces  or  helps  to  produce  tangible 
products  which  are  themselves  useful.  In  these  cases  the 
utility  of  land,  like  that  of  all  producers'  goods,  is  a  derived 
utility.  Its  utility  is  derived  from  that  of  its  products. 

There  are  great  differences  in  the  utility  or  desirability  of 
different  pieces  of  land,  whether  they  are  used  for  one  purpose 

409 


410          PRINCIPLES  OF  POLITICAL  ECONOMY 

or  for  another.  In  the  chapter  on  land  it  was  pointed  out 
that  these  differences  are  mainly  in  location  and  fertility.  The 
other  qualities  which  make  land  usable,  such  as  extension  and 
solidity,  all  land  possesses  in  equal  degree,  so  that  these  quali- 
ties do  not  make  one  piece  more  desirable  than  another ;  but 
in  the  qualities  of  location  and  fertility  there  are  great  differ- 
ences, and  these  differences  powerfully  affect  its  desirability 
and  its  value. 

Differences  in  the  desirability  of  land.  The  problem  of  rent 
may  be  approached  in  several  ways.  In  the  first  place,  we  may 
concentrate  our  attention  on  the  differences  in  rent  or  the  dif- 
ferences in  the  desirability  of  different  pieces  of  land.  There 
is  always  land  somewhere  the  use  of  which  can  be  had  free  of 
charge.  Nevertheless,  men  will  be  found  paying  high  rents 
for  other  land  which  is  more  desirable  than  that  which  can  be 
had  free  of  charge.  The  fact  that  it  is  more  desirable  than  the 
free  land  is  what  makes  it  command  a  rent.  In  the  case  of 
land  which  is  useful  for  production  only,  its  desirability  is  of 
course  determined  by  its  productivity.  He  who  secures  the  use 
of  a  superior  piece  of  land  can  either  produce  more  at  the  same 
cost  than  would  be  possible  on  the  kind  of  land  which  is  free 
or  he  can  produce  the  same  amount  at  lower  cost.  This  differ- 
ence in  productivity  gives  its  owner  a  rent  when  he  cultivates 
or  uses  it  himself,  and  enables  a  tenant  to  pay  rent,  in  case 
the  land  is  worked  by  a  tenant. 

Location  as  an  element  in  desirability.  That  the  location  of 
a  piece  of  land  will  affect  its  productivity  will  be  clear  to  any- 
one who  will  consider  that  the  cost  of  transporting  goods  to 
market  is  a  part  of  the  cost  of  production.  If  one  farm  is  so 
badly  located  with  respect  to  railroads  and  markets  that  it  costs 
ten  cents  a  bushel  to  haul  the  wheat  to  the  nearest  railroad, 
while  another  farm  is  so  well  located  that  the  hauling  costs 
only  two  cents  a  bushel,  it  is  evident  that  if  the  two  farms 
are  equally  fertile,  the  former  will  be  worth  considerably  less 
than  the  latter.  The  difference  of  eight  cents  a  bushel  in  the 


THE  RENT  OF  LAND  411 

cost  of  haulage  would  make  a  difference  of  $2.40  per  acre 
if  the  average  crop  on  the  two  farms  was  thirty  bushels  per 
acre.  A  tenant  could  afford  to  pay  that  much  more  for  the 
well-situated  than  for  the  badly  situated  farm. 

If  land  were  so  abundant  that  the  badly  situated  farm  in 
the  above  illustration,  and  other  land  equally  desirable,  could 
be  had  rent  free,  and  if  it  were  the  most  desirable  land  which 
could  be  had  free,  then  land  of  this  type  might  be  called 
marginal  land,  or  land  on  the  margin  of  cultivation.  By 
marginal  land  is  meant  land  which,  under  the  conditions  of 
the  market,  men  would  be  induced  to  cultivate  if  it  cost  them 
nothing,  but  which  they  would  abandon  and  leave  unused  if 
they  were  required  to  pay  even  the  lowest  conceivable  rent  for 
its  use.  Under  these  conditions  the  rent  of  the  well-located 
farm  of  the  above  illustration  would  be  $2.40  per  acre,  assum- 
ing that  wheat  is  the  only  crop. 

The  margin  of  cultivation.  Aside  from  the  productivity  of 
the  land,  two  other  factors  help  to  determine  the  margin  of 
cultivation.  These  are  the  demand  for  products  and  the  de- 
mand for  labor,  or  the  opportunities  for  the  employment  of 
labor.  An  increase  in  the  demand  for  products  will  generally 
bring  land  into  cultivation  which  would  otherwise  have  re- 
mained idle,  whereas  a  decrease  in  the  demand  for  products 
will  cause  some  poor  land  to  be  abandoned  which  would  other- 
wise have  remained  in  use.  The  margin  of  cultivation  may 
change,  however,  for  other  reasons.  When  the  prairies  of  the 
West  were  brought  into  cultivation,  the  margin  was  extended 
in  that  direction  ;  but  this  threw  so  many  products  on  the 
market  that  some  of  the  less  productive  lands  of  New  England 
could  no  longer  be  advantageously  cultivated.  Much  of  this 
land  was  abandoned,  and  the  margin  of  cultivation  was  con- 
tracted in  this  section.  The  extension  of  the  margin  on  the 
western  frontier  and  the  contraction  on  the  rocky  hillsides  of 
New  England  tended  to  counteract  one  another.  There  was, 
however,  at  the  same  time  a  growing  demand  for  products, 


412          PRINCIPLES  OF  POLITICAL  ECONOMY 

so  that  the  expansion  in  one  direction  more  than  made  up  for 
the  contraction  in  the  other.  In  other  words,  the  total  pro- 
duction actually  increased,  despite  the  diminution  on  some  of 
the  New  England  farms. 

Factors  which  extend  the  margin  of  cultivation.  An  in- 
crease in  the  supply  of  labor  which  is  seeking  employment, 
unless  counteracted  by  a  corresponding  increase  in  the  demand 
for  it  elsewhere,  will  generally  extend  the  margin  of  cultivation 
and  cause  land  to  be  cultivated  which  would  otherwise  have 
remained  idle.  This  problem  may  be  approached  from  two 
points  of  view.  In  the  first  place,  idle  land  may  be  regarded 
as  an  opportunity  for  idle  men.  When  the  supply  of  labor  in- 
creases faster  than  the  demand  for  it,  the  number  of  idle  men 
increases.  Some  of  these  idle  men  are  then  crowded  out  onto 
the  idle  land.  Even  if  they  are  not  actually  thrown  out  of  work, 
the  results  are  much  the  same.  There  is  always  a  current  of 
migration  from  the  farms  to  the  towns.  When  the  labor  mar- 
ket in  the  towns  is  overcrowded,  country  boys  find  fewer 
inducements  to  leave  the  country.  Therefore  they  must  per- 
force remain  on  the  farms  and  cultivate  the  land.  When 
larger  inducements  are  offered  in  the  towns,  more  of  them 
leave  the  farms  and  less  land  can  then  be  cultivated. 

Another  way  of  approaching  this  problem  is  by  considering 
the  wages  of  farm  labor.  When  farm  labor  can  be  had  at  a 
low  cost,  some  land  can  be  cultivated  profitably  which  could 
not  be  if  the  same  kind  of  labor  cost  more.  Wherever  farm 
labor  is  cheap,  we  actually  find  that  there  is  little  land  going 
to  waste  except  the  very  poorest.  Where  farm  labor  is  expen- 
sive and  hard  to  find,  we  actually  find  fairly  good  land  going 
to  waste.  Only  the  best  land  can  be  profitably  cultivated  by 
expensive  labor.  It  must  be  remembered,  however,  that  labor 
is  not  necessarily  expensive  merely  because  wages  are  high. 
Very  efficient  labor  may  be  cheap  even  though  it  is  paid  high 
wages,  and  very  inefficient  labor  may  be  expensive  even  though 
it  works  for  low  wages.  With  this  explanation  it  ought  to  be 


THE  RENT  OF  LAND  413 

clear  that,  with  a  given  demand  for  farm  products,  poorer  larid 
can  be  cultivated  if  labor  is  abundant  and  cheap  than  would  be 
profitable  if  it  were  scarce  and  dear. 

Different  grades  of  land.  A  partial  illustration  of  the  doc- 
trine of  rent  can  be  found  in  a  study  of  the  following  figure 
and  the  explanation  which  follows  it.  It  is  only  a  partial  ex- 
planation, however,  because  it  omits  the  law  of  diminishing 
returns.  This  lack  will  be  corrected  in  the  subsequent  illustra- 
tion and  explanation. 


Grade 

A, 

yielding 

1000  units 

of 

product 

to  100 

units 

of 

labor. 

Grade 

B, 

yielding 

900 

units 

of 

product 

to  100 

units 

of 

labor. 

Grade 

c, 

yielding 

800 

units 

of 

product 

to  100 

units 

of 

labor. 

Grade 

D, 

yielding 

700 

units 

of 

product 

to  100 

units 

of 

labor. 

Grade 

E, 

yielding 

600 

units 

of 

product 

to  100 

units 

of 

labor. 

Let  us  assume  a  miniature  community  possessing  five  grades 
of  land,  as  indicated  in  the  above  figure.  On  the  best  grade  of 
land,  which  is  of  limited  extent,  100  units  of  labor  will  pro- 
duce 1000  units  of  product;  on  the  next  grade,  900  units  of 
product ;  on  the  next,  800  units  of  product ;  etc.  If  the  de- 
mand of  the  community  were  for  only  1000  units  of  product 
and  there  were  only  100  units  of  labor,  only  the  best  grade 
of  land  could  be  used.  Until  it  was  all  in  use  there  would 
be  no  rent.  But  if  the  population  were  to  increase  so  that 
there  was  an  increase  in  the  demand  for  products  and  also  in 
the  supply  of  labor,  grade  A  would  not  continue  to  be  suffi- 
cient. If,  for  example,  the  demand  were  to  increase  so  that 
1500  units  of  product  were  needed,  some  of  it  would  have  to 
be  produced  on  the  second  grade  of  land,  which  would  thus  be 
the  marginal  land.  On  this  marginal  grade,  however,  each  unit 


414          PRINCIPLES  OF  POLITICAL  ECONOMY 

of  labor  would  produce  only  nine  units  of  product,  whereas  on 
the  best  grade  it  would  .produce  ten  units.  Clearly  each  pro- 
ducer would  rather  work  on  Grade  A  than  on  Grade  B.  Be- 
cause of  this  preference  he  can  be  persuaded  to  pay  something 
for  the  privilege  of  working  on  Grade  A.  Approximately  one 
unit  of  product  for  each  unit  of  labor  would  be  paid  for  the 
privilege  of  farming  on  Grade  A.  An  owner  of  a  portion  of 
Grade  A  who  works  it  himself  is  better  off  than  an  owner  of  a 
portion  of  Grade  B.  This  excess  of  his  income  over  that  of  an 
equally  good  worker  on  Grade  B  is  rent  just  as  truly  as  though 
he  received  it  in  cash  from  a  tenant. 

If  the  demand  for  products  continues  to  increase  until  it 
requires  2500  units  of  product,  some  of  Grade  C  will  have  to 
be  brought  into  use.  This  would  now  be  the  marginal  grade. 
On  Grade  C,  however,  each  unit  of  labor  produces  only  eight 
units  of  product.  Rather  than  work  on  this  land,  producers 
would  be  willing  to  pay  something  for  the  privilege  of  working  on 
either  Grade  A  or  Grade  B.  Each  unit  of  labor  would  be  will- 
ing to  pay  approximately  two  units  of  product  for  the  privilege 
of  working  a  portion  of  Grade  A,  or  one  unit  for  the  privilege 
of  working  a  portion  of  Grade  B,  rather  than  be  forced  to  cul- 
tivate land  of  Grade  C.  In  either  case  it  would  have  as  much 
left  as  it  would  have  if  it  got  the  whole  of  the  product  on 
Grade  C  without  any  deduction  for  rent.  If  we  go  on  assum- 
ing an  increase  in  the  population,  and  a  consequent  increase  in 
the  demands  for  products  and  in  the  number  of  units  of  labor 
available  for  the  cultivation  of  land,  we  shall  find  each  of  the 
Grades  D  and  E  in  succession  brought  into  cultivation,  and 
the  rent  going  up  correspondingly  on  every  grade  except  the 
marginal  one. 

Differences  in  productivity.  The  differences  in  the  produc- 
tivity of  land  may  be  represented  or  illustrated  by  the  following 
diagram  if  it  is  understood  that  lands  of  different  grades  are 
ranged  along  the  line  OX,  with  the  most  productive  piece  of  land 
at  the  point  O  and  absolutely  barren  land  at  the  point  X,  with 


THE  RENT  OF  LAND 


415 


every  variation  between.  If  we  measure  the  productivity  of  the 
different  parcels  on  the  line  O  Y,  the  curve  YB X  may  be  called 
the  productivity  curve.  When  a  total  product  represented  by 
the  surface  OA  YBC  is  to  be  produced,  only  the  land  between 
O  and  C  will  be  required.  That  at  the  point  C  will  be  marginal 
land,  and  all  between  C  and  X  will  be  unused.  The  line  BC 
represents  the  productivity  of  the  marginal  land,  and  the  sur- 
face YBA  will  represent  the  rent  on  all  the  other  land  in  use. 
Relation  of  diminishing  returns  to  rent.  This  explanation, 
however,  is  incomplete,  as  any  explanation  of  rent  is  incom- 
plete unless  it  takes  into  account  the  law  of  diminishing 
returns.  Even  on  the 
best  land  —  in  fact, 
on  any  grade  of  land 
—  different  applica- 
tions of  labor  and 
capital  produce  dif- 
ferent results.  After 
a  certain  quantity  of 
labor  and  capital  have 
been  applied  to  the  cultivation  of  a  given  piece  of  land,  further 
increase  in  the  labor  and  capital  do  not  yield  proportionately 
increased  returns.1  If  this  were  not  true,  it  would  never  be 
necessary  to  cultivate  any  but  the  best  grade  of  land.  If,  for 
example,  200  units  of  labor  on  Grade  A  of  the  land  described 
in  the  figure  on  page  413  would  produce  2000  units  of  product, 
that  would  be  better  than  to  spread  it  over  both  Grades  A  and 
B,  where  it  would  produce  only  1900  units  of  product.  Again, 
if  300  units  of  labor  would  produce  3000  units  of  product, 
and  400  units  of  labor  4000  units  of  product,  and  so  on  in- 
definitely, we  should  have  what  are  called  constant  as  opposed 
to  diminishing  returns.  If  constant  returns  could  be  secured 
indefinitely,  as  stated  above,  it  would  never  be  advisable  to 
cultivate  any  land  but  Grade  A  of  our  illustration. 

1  As  shown  in  Chapter  XXX,  on  The  Law  of  Variable  Proportions. 


41 6          PRINCIPLES  OF  POLITICAL  ECONOMY 

But  the  simple  and  well-known  fact  is  that  increasing  ap- 
plications of  labor  and  capital  to  the  same  land  do  not  yield 
constant  returns,  much  less  increasing  returns.  Instead  of  200 
units  of  labor  yielding  2000  units  of  product  on  Grade  A,  and 
300  units  of  labor  yielding  3000  units  of  product,  it  is  more 
likely  that  200  units  of  labor  would  yield  1 800  units  of  product, 
and  300  units  of  labor  2400  units  of  product,  or  some  such 
quantity.  If  that  were  the  case,  it  would  be  better  to  take 
Grades  B  and  C  into  cultivation  rather  than  to  put  all  the 
increasing  labor  supply  onto  Grade  A.  Unless  something  like 
this  rate  of  diminution  in  the  returns  should  result,  the  inferior 
grades  would  never  come  into  use  at  all. 

The  value  of  land  to  the  community.  Thus  far  we  have 
been  considering  the  differences  in  the  productivity  of  different 
grades  of  land  as  the  reason  why  rent  is  paid  and  the  factor 
which  determines  how  much  rent  is  paid  for  land  of  a  given 
grade.  Another  way  of  viewing  it,  which  leads  to  the  same 
result,  is  to  consider  how  much  better  off  the  community  is 
when  a  given  piece  of  land  is  In  cultivation  than  when  it 
is  not.  If  there  is  an  abundance  of  uncultivated  land  in  every 
way  as  good,  location  and  everything  considered,  as  the  piece 
of  land  in  question,  the  only  result  of  withdrawing  it  from 
cultivation  would  be  to  bring  into  cultivation  an  equal  quantity 
of  other  land.  In  such  a  case  the  community  loses  nothing 
when  it  is  withdrawn  from  cultivation,  nor  would  it  gain  any- 
thing if  it  were  brought  back  into  cultivation.  There  being 
more  land  of  this  grade  than  can  be  cultivated,  some  labor 
must  be  withdrawn  from  other  land  when  this  piece  of  land 
is  cultivated. 

If,  however,  there  is  a  scarcity  of  land  of  the  grade  of  the 
piece  of  land  in  question,  there  is  certain  to  be  a  decrease  in 
the  total  production  of  the  community  if  it  is  withdrawn  from 
cultivation,  and  an  increase  when  it  is  brought  back  into  culti- 
vation. If  it  is  withdrawn  from  cultivation,  the  labor  and  tools 
which  were  used  in  cultivating  it  must  now  find  employment 


THE  RENT  OF  LAND  417 

on  other  land.  If  it  goes  onto  poorer  land,  such  as  has  been 
hitherto  uncultivated,  its  product  will  be  less.  The  production 
of  the  community  is  decreased  by  the  amount  of  the  difference 
between  the  product  on  the  piece  of  land  in  question  and  the 
product  on  the  poorer  land.  If  the  labor  and  tools  go  onto 
land  which  is  already  under  cultivation,  it  merely  adds  to  the 
number  of  laborers  and  tools  already  on  that  land,  and  carries 
the  margin  of  cultivation  a  little  farther.  It  will  add  something 
to  the  product  from  that  land,  but  not. an  amount  equal  to  the 
total  product  formerly  produced  on  the  land  which  is  now 
thrown  out  of  cultivation.  The  difference  between  the  total 
amount  produced  on  the  land  now  thrown  out  of  cultivation 
and  the  amount  which  the  labor  and  tools  could  add  to  the 
product  from  other  land  measures  the  loss  to  the  community 
when  the  piece  of  land  in  question  is  thrown  out  of  cultivation, 
and  the  corresponding  gain  when  it  is  brought  back  into 
cultivation.  This  difference,  however,  corresponds  to  the  rent 
of  the  land. 

The  law  of  rent.  The  rent  of  a  piece  of  land,  therefore, 
is  determined  by  the  difference  between  what  can  normally  be 
produced  upon  it  and  what  an  equal  amount  of  labor  and  cap- 
ital can  produce  in  less  advantageous  positions  still  open  to 
them.  These  less  advantageous  positions  may  be  found  either 
by  going  onto  the  inferior  lands  still  uncultivated  or  by  crowding 
onto  land  already  cultivated. 


CHAPTER  XXXV 

THE  SOURCE  OF  INTEREST 

What  is  interest?  One  of  the  most  difficult  and  elusive  of 
all  problems  in  economics  is  that  of  the  interest  of  capital. 
Interest  may  be  defined  as  the  income  which  goes  to  the 
owner  of  capital,  whether  he  uses  it  in  his  own  business  or 
lends  it  to  somebody  else.  This  income  may  take  any  one  of 
several  forms.  The  most  common  and  clearly  understood 
form  is  where  a  definite  sum  of  value,  represented  usually  by 
money,  is  loaned  by  the  owner  to  someone  else.  The  bor- 
rower, in  return  for  the  loan,  eventually  pays  back  not  only 
the  principal  but  a  stated  sum  or  percentage  of  the  principal 
year  by  year.  The  transfer  of  purchasing  power  from  the 
lender  to  the  borrower,  however,  does  not  necessarily  take  the 
form  of  money.  It  may  be  rather  a  claim  upon  some  credit 
institution  for  money,  as  when  the  lender  gives  the  borrower 
a  check  on  the  bank.  The  borrower  then  deposits  this  check 
in  his  own  bank  and  proceeds  to  draw  his  own  checks  against 
this  deposit.  In  a  case  of  this  kind  no  money  is  transferred, 
and  the  borrower  may  not  even  see  or  handle  any  money. 
Nevertheless  there  has  been  transferred  to  the  borrower  pur- 
chasing power  in  the  form  of  a  claim  upon  the  bank  for  money. 
But  the  purpose  of  the  borrower  was  not  ultimately  to  secure 
money.  Money  is  to  him  only  a  means  of  purchasing  some- 
thing which  he  really  wants,  and  if  he  can  make  the  purchases 
without  actually  handling  the  money,  —  by  handling  credit  in- 
struments instead,  or  claims  upon  a  bank  for  money,  —  his  pur- 
pose is  answered  just  as  well.  Aristotle  pointed  out  long  ago 
that  money  serves  merely  as  a  claim  upon  society  for  a  share 
of  the  general  fund  of  wealth  in  its  possession.  A  credit  in- 
strument is  only  a  more  highly  evolved  claim  of  the  same  kind. 

418 


THE  SOURCE  OF  INTEREST  419 

In  the  second  place,  the  capitalist  may  transfer  to  the 
borrower,  not  purchasing  power,  but  the  material  goods  which 
the  lender  desires  and  which  he  would  buy  if  he  were  given 
the  purchasing  power ;  that  is,  the  capitalist  may  transfer 
to  the  borrower  specific  pieces  of  capital,  such  as  buildings 
and  machinery,  allowing  the  borrower  the  use  of  these  pieces 
of  capital  for  a  definite  period  of  time.  At  the  end  of  the 
time  they  are  of  course  to  be  returned  to  the  lender.  Mean- 
while a  definite  sum  is  to  be  paid  at  stated  periods  for  their 
use.  This  sum  is  commonly  called  rent  rather  than  interest, 
and  there  are  some  reasons  for  this  custom.  In  the  first  place, 
the  sum  which  is  paid  in  the  form  of  money  for  the  use  of  a 
group  of  material  objects  cannot  be  reduced  to  a  percentage 
basis  until  those  objects  are  evaluated  and  their  quantities 
stated  in  terms  of  value.  Suppose  that  the  agreement  was,  to 
pay  five  thousand  dollars  a  year  for  a  certain  group  of  build- 
ings and  a  mass  of  tools  and  equipment.  The  five  thousand 
dollars  a  year  is  not  a  percentage  of  the  group  of  buildings. 
If,  however,  the  buildings  are  appraised  and  their  value  stated 
as  one  hundred  thousand  dollars,  then  it  is  possible  to  reduce 
the  annual  payment  for  their  use  to  a  percentage  basis.  It 
might  then  be  said  that  the  borrower  was  paying  5  per  cent 
on  the  sum  borrowed.  Unless  the  transaction  takes  this  form 
it  is  more  convenient  to  say  that  he  is  paying  five  thousand 
dollars  rent  than  to  say  that  he  is  paying  5  per  cent  interest. 
The  chief  reason  for  calling  it  interest  is  that  economists  have 
formed  the  habit  of  speaking  of  rent  as  that  which  is  paid  for 
the  use  of  land,  and  of  interest  as  that  which  is  paid  for  the 
use  of  capital.  Since  the  buildings  and  the  equipment  are  capi- 
tal rather  than  land,  that  which  is  paid  for  their  use  would  have 
to  be  called  interest,  unless  we  change  the  definition  of  interest. 

Distinction  between  rent  and  interest.  There  seem  to  be 
some  very  important  reasons  for  distinguishing  between  rent 
and  interest  in  this  way.  Land  is  a  natural  resource  ;  it  is 
not  the  product  of  human  foresight  or  of  human  industry. 


420          PRINCIPLES  OF  POLITICAL  ECONOMY 

Buildings,  tools,  equipment,  etc.  are  the  products  of  foresight, 
enterprise,  and  industry.  That  which  the  landowner  receives 
as  rent  for  his  land  he  receives  because  he  has  come  into  the 
possession  of  a  natural  agent  which  neither  he  nor  anyone 
else  produced ;  that  which  the  owner  receives  for  the  use  of 
buildings,  tools,  and  equipment  he  receives  for  something 
which  he  either  produced  or  paid  someone  else  for  producing. 
There  seems,  therefore,  to  be  a  wider  difference  between  that 
which  is  paid  for  the  use  of  buildings,  tools,  and  equipment  and 
that  which  is  paid  for  the  use  of  land  than  there  is  between 
that  which  is  paid  for  borrowed  money  and  that  which  is  paid 
for  buildings,  tools,  and  equipment.  In  this  discussion,  there- 
fore, we  shall  adhere  to  the  distinction  between  rent  and  interest 
which  nearly  all  standard  books  on  economics  have  followed. 

In  the  third  place,  the  income  of  the  capitalist  may  be 
secured  from  the  use  of  capital  in  his  own  business.  This, 
however,  is  sometimes  difficult  to  distinguish  from  profits. 
Economists  generally  distinguish  between  interest  and  profits 
in  this  way :  the  business  man  who  has  his  own  capital  in- 
vested in  his  business  is  allowed,  the  current  rate  of  interest 
on  that  investment ;  if  he  labors  or  puts  in  his  time  super- 
vising the  business,  he  is  also  allowed  a  salary  or  wages  of 
superintendence ;  if  he  has  anything  left  over  after  allowing 
himself  interest  and  wages,  this  surplus  is  called  profit  or 
profits.  If  he  has  not  been  particularly  successful,  the  profits 
may  be  negative ;  in  other  words,  he  may  incur  a  loss.  That 
means  that  his  total  income  may  not  be  as  great  as  it  would 
have  been  if  he  had  gone  out  of  business,  loaned  his  capital 
at  interest,  and  hired  out  at  a  salary  as  a  superintendent. 

Interest,  therefore,  as  it  is  generally  defined,  includes  that 
which  the  owner  receives  for  the  use  of  a  fund  of  purchasing 
power  which  he  transfers  to  a  borrower  ;  that  which  he  receives 
for  the  use  of  a  mass  of  material  goods,  buildings,  tools,  equip- 
ments, etc.  which  he  permits  the  borrower  to  use  for  a  stated 
period ;  and  that  which  he  receives  in  return  for  the  capital 


THE  SOURCE  OF  INTEREST  421 

which  he  owns  and  which  he  uses,  or  has  invested,  in  his 
own  business.  Care  must  be  taken,  in  considering  these  vari- 
ous forms  of  interest,  not  to  include  too  much.  That  which 
the  lender  of  a  fund  of  purchasing  power  receives  in  excess 
of  the  amount  necessary  to  preserve  the  fund  intact  is  inter- 
est, and  that  alone.  If  any  insurance  is  involved,  this  must 
be  deducted  from  the  total  amount  received.  Some  very  haz- 
ardous investments  appear  to  pay  very  high  rates  of  interest. 
This  may  be  called  gross  interest,  only  a  part  of  it  being  net 
interest,  the  remainder  being  payments  for  risk  and  akin  to 
profits  rather  than  interest.  Again,  when  equipment  itself  is 
loaned,  rather  than  a  fund  of  purchasing  power,  allowance 
must  be  made  for  deterioration.  Unless  the  capitalist  main- 
tains the  quantity  of  his  capital  intact,  and  receives  a  surplus  in 
addition  to  this,  he  has  not  received  interest.  It  might  easily 
happen  that  a  part  of  the  five  thousand  dollars  received  for 
the  buildings,  tools,  and  equipment  in  the  above  illustration 
was  necessary  to  keep  the  buildings  in  repair  and  to  recoup 
the  owner  for  the  necessary  deterioration.  In  short,  interest 
is  the  amount  which  the  owner  of  capital  receives  over  and 
above  the  sum  necessary  to  maintain  the  original  quantity  of 
his  capital. 

Why  is  interest  paid  ?  The  problem  of  interest  thus  defined 
divides  itself  into  two  parts :  first,  why  is  interest  paid  ?  second, 
what  determines  the  rate  of  interest  ?  One  answer  to  the  first 
question  is  that  capital  is  productive.  This  could  apply  only 
to  what  we  have  defined  as  productive  as  opposed  to  acquisitive 
capital.  That  any  kind  of  capital  is  productive  has  sometimes 
been  called  in  question.  Something  depends  upon  the  mean- 
ing of  the  word  productive.  No  one  has  challenged  the  propo- 
sition that  tools  are  useful.  Those  who  assert  that  capital  is 
productive  mean  absolutely  nothing  more  than  this.  Those 
who  deny  the  productivity  of  capital  invariably  have  some  other 
definition  of  the  word  productive  in  mind,  and  there  is  not 
much  to  be  gained  by  quibbling  over  the  use  of  words. 


422          PRINCIPLES  OF  POLITICAL  ECONOMY 

If  tools  are  useful,  it  is  pertinent  to  ask  for  what  are  they 
useful  ?  They  are  useful  for  production,  not  for  consumption. 
With  an  adequate  equipment  of  tools  one  can  produce  more 
than  one  can  produce  with  an  inadequate  equipment.  The 
formula,  "  More  and  better  tools,  more  production  ;  fewer  tools 
or  poorer  tools,  less  production,"  supplies  the  farmer  and  the 
business  man  with  as  good  a  theory  of  economic  causation  as 
any  logician  has  ever  been  able  to  invent.  If  I  am  a  farmer 
and  perceive  that  with  an  additional  horse  I  can  grow  a  larger 
crop  than  I  could  if  I  did  not  have  that  additional  horse,  I  am 
not  likely  to  puzzle  my  head  very  much  over  abstruse  questions 
of  economic  causation.  The  fact  that  a  larger  crop  will  result 
from  my  using  another  horse  is  a  sufficient  reason  why  I  should 
try  to  come  into  possession  of  that  horse. 

Marginal  productivity  of  capital.  It  is  true,  as  has  been 
pointed  out  and  argued  ad  nauseam,  that  if  I  did  not  have 
any  plows  or  tools  to  use  with  the  horse,  he  would  be  of  no 
use ;  or  if  I  did  not  have  any  labor  to  direct  him,  he  would 
not  produce  anything.  This  line  of  argument,  instead  of  prov- 
ing that  the  horse  is  not  productive,  merely  proves  that  other 
forms  of  capital,  as  well  as  labor,  are  also  productive.  In  any 
given  situation,  with  any  given  type  of  equipment,  find  out 
how  much  you  can  produce  without  any  particular  unit,  say 
the  horse  in  question,  and  then  how  much  you  can  produce 
with  it,  and  you  have  a  measure  of  the  productivity  of  that 
unit  in  that  situation.  At  any  rate,  it  is  a  fair  test  as  to  how 
much  that  unit  would  be  worth  when  added  to  the  rest  of  the 
equipment.  If  there  is  another  farmer  whose  equipment  calls 
for  an  extra  horse,  and  if  an  extra  horse  will  add  more  to  the 
product  on  his  farm  than  on  mine,  the  other  farmer  will  bid 
against  me  for  the  horse,  and  under  the  circumstances  can 
afford  to  pay  more  for  it  than  I  can.  If  he  has  n't  the  money 
with  which  to  purchase  it,  he  can  afford  to  pay  a  little  more 
for  the  use  of  the  money  than  I  can  afford  to  pay.  Apply 
this  test  to  each  and  every  kind  of  capital  required,  not  only 


THE  SOURCE  OF  INTEREST  423 

on  farms  but  in  shops  and  factories,  railroads,  stores,  etc.,  and 
we  get  an  idea  of  the  test  of  the  usefulness,  or  productivity, 
of  capital.  It  might  very  well  be,  however,  that  on  another 
farm,  where  there  was  a  surplus  of  horses,  the  farmer  in  charge 
would  find  that  one  more  horse  would  add  little  or  nothing  to 
his  crop.  Having  a  surplus  of  horses,  what  he  would  need 
more  than  he  would  need  an  extra  horse  would  be  some  extra 
plows  and  harrows,  or  plows  and  harrows  of  a  larger  size,  to 
balance  his  equipment.  If  he  understands  the  situation,  he 
will  see  that  it  is  to  his  advantage  to  sell  some  of  his  horses 
or  else  to  buy  other  equipment.  This  balancing  of  the  equip- 
ment of  industries  goes  on  all  through  society  and  is  one  of 
the  fundamental  problems  of  business  management.1 

Here  we  must  repeat  a  caution  which  was  given  in  the 
discussion  of  value.  We  are  not  to  discuss  the  productive- 
ness of  labor  in  general  or  of  capital  in  general,  a,ny  more 
than  we  are  to  discuss,  under  the  problem  of  value,  the  utility 
of  bread  in  general,  meat  in  general,  or  water  in  general. 
We  are  always  concerned  with  definite  units  which  may  be 
added  to  or  subtracted  from  the  existing  supply.  Therefore 
we  are  not  concerned  with  the  productiveness  of  horses  in 
general,  cows  in  general,  or  even  capital  in  general,  but  with 
the  need  for  definite  units  of  capital,  such  as  one  horse  more 
or  less,  one  cow  more  or  less  on  a  given  farm,  one  boiler 
more  or  less  in  a  real  factory,  and  so  on  through  the  whole 
range  of  industry.  Wherever  any  producer  finds  that  he  could 
use  more  capital  of  any  form  advantageously,  he  has  a  per- 
fectly good  reason  for  trying  to  get  an  additional  unit  of  that 
particular  kind  of  capital.  Whether  we  call  it  the  productivity 
of  the  unit  of  capital,  or  merely  its  usefulness,  does  not  matter. 

The  opposite  method  of  reasoning  is  involved  in  the  state- 
ment that  if  there  were  no  labor,  capital  could  not  produce  any- 
thing. This  is  dealing  with  labor  in  general  and  capital  in 
general.  It  is  likewise  true,  of  course,  that  if  there  were  not 

1  Compare  Chapters  XV  and  XXX. 


424          PRINCIPLES  OF  POLITICAL  ECONOMY 

any  capital,  labor  would  not  be  able  to  produce  very  much  dur- 
ing the  next  month  or  the  next  year,  —  not,  in  fact,  until  it  had 
equipped  itself  with  a  new  supply  of  tools.  It  might  very  well 
happen  that  in  any  definite  community,  like  the  overcrowded 
section  of  a  great  city,  there  would  be  more  unskilled  labor  than 
could  possibly  be  used  at  that  particular  place.  The  formula 
"  More  of  this  particular  kind  of  labor,  more  product "  would 
not  apply.  When  we  speak,  therefore,  of  the  productivity  of 
capital,  we  do  not  mean  that  capital  is  productive  under  all  pos- 
sible circumstances,  regardless  of  the  surroundings.  Neither  is 
labor  productive  in  that  sense ;  it  has  to  be  located  where  there 
is  at  least  land  available,  and  in  order  that  it  may  be  very  pro- 
ductive it  must  -have  an  adequate  supply  of  tools.  In  short, 
nothing  is  productive  when  it  stands  alone,  unrelated  to  many 
other  things  in  the  surrounding  universe.  Labor,  of  course,  is  a 
more  fundamental  and  primary  agent  of  production  than  capital, 
since  capital  is  itself  the  result  of  labor,  thrift,  and  enterprise. 
But  we  are  not,  in  a  practical  work  on  economics,  dealing  with 
an  absolutely  primitive  economic  situation ;  we  are  dealing  rather 
with  the  conditions  which  we  find  all  around  us,  and  with  the 
specific  needs  of  specific  industries  and  specific  communities. 
What  does  capital  include?  As  capital  was  defined  in  the 
chapter  devoted  to  that  subject,  it  includes  something  more 
than  producers'  goods.  It  includes  consumers'  goods  which 
are  loaned,  rented,  or  hired  in  order  to  secure  income  for  their 
owner.  In  these  cases  the  income  of  the  capitalist  is  not  due 
to  the  productivity  of  the  consumers'  goods  thus  loaned  ;  it  is 
due  rather  to  their  usefulness  in  consumption.  He  who  builds 
a  dwelling  house,  or  hires  someone  else  to  build  it,  and  then 
rents  it  to  an  occupant,  is  virtually  selling  the  flow  of  utilities 
which  the  house  furnishes  to  the  occupant  during  a  definite 
period  of  time.  These  utilities  are  in  the  form  of  comfort, 
convenience,  luxury,  and  even  style  in  some  cases ;  but  the 
problem  of  interest  is  much  the  same,  in  the  last  analysis, 
whether  the  capital  be  productive  or  acquisitive. 


THE  SOURCE  OF  INTEREST  425 

Capital  itself,  not  its  value,  is  productive.  Those  who 
deny  the  productivity  of  capital  generally  have  a  special  defi- 
nition of  capital.  Instead  of  thinking  of  productive  agents  they 
are  usually  thinking  of  a  sum  of  value.  They  do  not  neces- 
sarily mean  money,  but  a  fund  of  value  which  is  embodied  in 
capital  goods.  Of  course  the  value  of  capital  goods  does  not 
produce  anything.  The  value  of  the  horse  does  not  cause  him 
to  do  good  farm  work ;  it  is  the  fact  that  he  does  good  farm 
work  which  causes  him  to  have  value.  If,  instead  of  think- 
ing of  the  farmer's  capital  as  horses,  cows,  and  other  equip- 
ment, we  think  merely  of  the  value  which  is  embodied  in 
them,  we  may  easily  reach  the  conclusion  that  capital  is  not 
productive  ;  but  if,  instead  of  thinking  of  the  value  which  is 
embodied  in  them,  we  think  of  the  objects  themselves,  we  can 
hardly  avoid  the  conclusion  that  they  are  the  agents  by  which 
production  is  increased. 

In  order  to  bring  the  law  of  interest  under  the  general  law 
of  value,  let  us  recall  the  fact  that  things  have  value  only  when 
they  are  wanted  by  someone.  This  is  as  true  of  capital  as  of 
anything  else.  If  we  confine  our  attention  to  that  portion  of 
capital  which  consists  of  producers'  goods,  without  considering 
the  subject  of  consumers'  goods  which  are  used  by  their  owners 
for  the  getting  of  an  income,  it  is  safe  to  say  that  the  use  of 
capital  is  desired  only  for  the  sake  of  what  it  will  add  to  the 
productive  power  of  the  user.  He  does  not  want  it  for  his  own 
sake.  If  it  added  nothing  to  his  productive  power,  he  would 
not  want  it  and  would  not  be  willing  to  pay  a  price  for  the 
privilege  of  using  it.  Even  the  owner  desires  to  own  capital 
not  because  capital  is  itself  capable  of  use  later  but  because  it 
is  capable  of  adding  to  his  income.  If  it  added  nothing  to  his 
income  (that  is,  if,  as  the  result  of  using  it  in  his  business,  he 
was  merely  able  to  get  back  the  original  cost,  that  is,  the  prin- 
cipal), he  would  have  no  motive  for  owning  it  or  using  it.  The 
more  it  will  add  to  the  productivity  of  his  business,  the  more 
he  will  desire  the  use  of  it. 


426          PRINCIPLES  OF  POLITICAL  ECONOMY 

Why  capital  is  wanted.  The  productivity  of  capital,  or  the 
advantage  of  having  the  use  of  it,  is  subject  to  the  principle 
of  marginal  productivity,  as  is  the  productivity  of  labor  and 
land.  If  you  increase  the  number  of  instruments  of  a  given 
kind  in  any  industrial  establishment,  leaving  everything  else  in 
the  establishment  the  same  as  before,  you  may  within  limits 
increase  the  total  product  of  the  establishment  somewhat, 
but  you  will  not  increase  the  product  in  proportion  to  the 
increase  in  the  number  of  instruments  in  question.  If  you  in- 
crease all  the  instruments  in  a  given  industrial  establishment 
without  increasing  the  labor  at  the  same  time,  each  instrument 
will  be  used  a  little  less  intensively,  or  it  will  be  idle  a  greater 
number  of  minutes  per  day,  simply  because  of  the  scarcity  of 
labor.  On  the  other  hand,  of  course,  if  you  diminish  the  num- 
ber of  instruments  or  the  total  equipment,  leaving  the  amount 
of  labor  the  same,  each  instrument,  or  each  unit  of  the  equip- 
ment, will  have  to  be  used  more  intensively. 

The  productivity  of  capital  decreases,  other  things  being 
equal,  as  its  quantity  increases.  Take  a  farm,  for  example. 
With  a  given  labor  force,  the  greater  the  number  and  variety  of 
tools  and  implements,  the  less  intensively  each  one  is  likely  to 
be  used  ;  and  the  smaller  the  number,  the  more  intensively  each 
is  likely  to  be  used.  There  are  many  farms  on  which  it  is  found 
that  there  are  such  a  number  and  variety  of  tools  and  implements 
that  the  farmer  is  really  not  getting  any  interest  on  a  large  part 
of  his  investment.  Some  expensive  tools  are  idle  so  much  of 
the  year  that  they  do  not  pay  for  themselves  ;  that  is,  the  farmer 
never  gets  back  the  original  price  which  he  paid,  to  say  nothing 
about  getting  interest  on  that  price.  On  the  other  hand,  there  are 
other  farms  so  poorly  equipped  that  every  tool  in  the  farmer's 
equipment  is  used  very  intensively,  and  it  would  be  money  in 
the  farmer's  pocket  to  invest  in  additional  equipment.  For 
every  dollar  which  he  put  into  more  and  better  tools,  he  would 
get  back  not  only  the  original  cost  price  but  something  in 
addition  which  could  be  called  interest  on  the  investment. 


THE  SOURCE  OF  INTEREST  427 

That  which  is  found  to  happen  on  farms  is  also  found  to  hap- 
pen in  larger  industrial  establishments,  factories,  railroads,  etc. 

That  which  is  true  of  an  individual  farm,  shop,  or  other  busi- 
ness establishment  is  also  true  of  the  community  as  a  whole. 
If,  for  example,  there  are  very  few  plows  in  a  given  community 
where  there  is  an  abundance  of  land,  many  laborers,  and  much 
other  capital  besides  plows,  each  and  every  plow  would  be  a 
matter  of  considerable  importance ;  it  would  be  in  general  de- 
mand and  would  be  used  a  great  number  of  days  in  the  year. 
Under  these  conditions  you  could  say  of  that  community,  "  One 
more  plow,  considerably  more  product ;  one  less  plow,  consider- 
ably less  product "  ;  in  short,  the  marginal  productivity,  in  that 
particular  community,  of  that  form  of  capital  called  plows  would 
be  high.  If,  on  the  other  hand,  there  were  a  great  number  and 
variety  of  plows  in  the  community,  other  factors  remaining  the 
same,  each  one  would  be  a  matter  of  much  less  importance ; 
each  one  would  be  idle  a  greater  number  of  days  in  the  year. 
Then  you  could  say,  "  One  more  plow,  comparatively  little  more 
product;  one  less  plow,  comparatively  little  less  product";  in 
short,  the  marginal  productivity  of  plows  would  be  low. 

Applying  the  same  method  of  reasoning  to  other  forms  of 
capital  or  to  all  forms  of  capital,  we  reach  the  same  conclu- 
sions. An  abundance  of  all  forms  of  capital,  land  and  labor 
remaining  the  same,  would  give  a  low  marginal  productivity  to 
capital ;  whereas  a  scarcity  of  all  forms  of  capital,  land  and  labor 
remaining  the  same,  would  give  a  high  productivity  to  all  forms 
of  capital.  This  would  show  itself  in  the  case  of  liquid,  or  unin- 
vested, capital.  Where  all  forms  of  capital  are  scarce,  one  hun- 
dred dollars  invested  in  tools  would  add  considerably  to  the 
productivity  of  the  community  ;  but  where  all  forms  of  capital  are 
very  abundant,  then  one  hundred  dollars  invested  in  additional 
tools  would  be  of  comparatively  little  value. 

The  following  diagram  will  serve  as  an  illustration  of  this 
law  and  also  as  a  means  of  introducing  the  next  question  to 
be  considered  in  the  general  problem  of  interest. 


428          PRINCIPLES  OF  POLITICAL  ECONOMY 

Let  the  amount  of  capital  in  the  industrial  community  be  measured 

along  the  horizontal  line  AC;  let  the  productivity  of  capital  be  measured 

along  the  perpendicular  line  AE;  and  let  the  descending  line  EC  represent 

the  rate  of  decrease  in  the  marginal  productivity  of  capital.    If  the  amount 

_  of  capital  were  measured 

by  AD,  the  marginal 
productivity  would  be 
measured  by  the  line 
BD,  or  AF.  If  the 

B'  amount  of  capital  were 

measured  by  AD',  the 
'**»  marginal       productivity 

"^^  would,  other  things  re- 

—  _,        „ ^,    maining  equal,  be  meas- 
ured by  the  line  RH, 

or  AF' ;  and  when  the  amount  of  capital  equaled  AD",  marginal  pro- 
ductivity would  equal  B" D" ,  or  AF" .  From  this  it  follows  inevitably 
that  if  capital  went  on  increasing  to  AC,  the  marginal  productivity  of 
capital  would  be  destroyed  altogether.  That  is  to  say,  the  supply  of  capi- 
tal would  have  reached  that  limit  where  no  more  could  be  used  to  advan- 
tage, and  some  could  be  spared  without  loss.1 

1  T.  N.  Carver,  The  Distribution  of  Wealth,  pp.  223-224.   The  Macmillan 
Company,  New  York. 


CHAPTER  XXXVI 

THE  COST  OF  CAPITAL  AND  ITS  PRICE 

Why  capital  is  scarce.  Seeing  that  the  productivity  of  capi- 
tal, or  its  advantageous  use,  diminishes  as  the  supply  of  capital 
increases  relatively  to  other  factors,  and  increases  as  the  sup- 
ply of  capital  diminishes  relatively  to  other  factors,  it  is  quite 
important  that  we  should  be  able  to  account  for  the  supply  of 
capital  as  well  as  for  its  demand.  Its  demand,  as  has  already 
been  suggested,  is  based  upon  its  desirability  in  production, 
that  is,  upon  its  productivity  or  the  opportunity  for  its  advan- 
tageous use.  Unless,  therefore,  the  supply  were  in  some  way 
limited,  capital  might  become  so  abundant  as  to  leave  it  with 
no  marginal  productivity.  We  found,  when  we  were  discussing 
the  value  of  commodities,  that  the  cost  of  producing  them 
operated  as  a  check  on  production  and  kept  the  supply  within 
such  limits  as  would  give  them  a  price  approximately  sufficient 
to  pay  the  cost  of  production.  Some  factor  must  be  found 
which  will  limit  the  supply  of  capital. 

The  irksomeness  of  waiting.  There  are  two  factors  which 
are  obviously  at  work.  One  is  the  mere  cost  of  producing  the 
capital  goods  ;  the  other  is  the  cost  of  waiting,  or  the  disincli- 
nation which  the  average  individual  feels  toward  waiting.  The 
cost  of  producing  tools  needs  very  little  discussion.  Unless 
the  farmer's  plow  will  return  him,  before  it  is  worn  out, 
enough  to  replace  the  price  which  he  originally  paid  for  it, 
he  will  of  course  have  no  motive  for  paying  that  price.  If 
plows  should  become  so  numerous  on  a  given  farm  that  the 
farmer  felt  that  he  would  probably  never  get  back  enough  from 
a  new  plow,  added  to  those  already  in  use,  to  repay  the  price 
of  that  plow,  it  would  be  foolish  for  him  to  buy  it.  If  every 

429 


430          PRINCIPLES  OF  POLITICAL  ECONOMY 

farmer  behaves  in  this  way,  certainly  no  more  plows  will  be 
bought  than  can  be  used  with  that  degree  of  advantage.  If  he 
has  to  pay  fifty  dollars  for  a  new  riding  plow,  and  if  he  figures 
that  in  the  course  of  its  lifetime  it  will  add  only  fifty  dollars 
to  his  product  over  and  above  what  he  could  produce  with  his 
existing  equipment,  then  he  would  of  course  gain  nothing  from 
its  purchase ;  he  would  merely  get  back  the  original  purchase 
price.  If  the  average  farmer  had  no  disinclination  toward  wait- 
ing, it  is  probable  that  farmers  would  buy  so  "many  plows  as 
to  reduce  the  marginal  productivity  of  plows  to  the  level  of  the 
cost,  that  is,  to  the  level  of  the  purchase  price. 

But  suppose  that  the  plow  which  cost  fifty  dollars  will  return 
the  farmer  only  five  dollars  a  year  and  will  last  ten  years ;  it 
then  just  replaces  its  original  cost ;  the  farmer  will  have  got 
back  at  the  end  of  ten  years  the  money  which  he  put  into  it, 
and  no  more.  Meanwhile  he  has  had  to  wait  ten  years.  If 
he  did  not  mind  waiting,  —  if  waiting  were  not  in  the  slightest 
degree  irksome  to  him,  —  he  would  probably  be  willing  to  buy 
a  plow  under  such  circumstances,  though  there  would  be 
neither  loss  nor  gain.  If,  however,  he  does  not  like  to  wait,  — 
if  he  prefers  present  enjoyment  to  future  enjoyment,  —  then  he 
would  hold  on  to  his  fifty  dollars  in  the  first  place  rather  than 
spend  it  for  something  which  will  return  fifty  dollars  in  ten 
years'  time.  Under  these  circumstances  he  will  certainly  not 
buy  the  plow  unless  he  has  so  few  plows  as  to  give  a  higher 
marginal  productivity  than  that  which  we  have  been  discussing. 
If  he  has  so  few  plows  that  the  possession  of  an  additional 
plow  will  in  the  course  of  ten  years  add  one  hundred  dollars 
to  his  income,  he  will  add  fifty  dollars  to  his  wealth  during 
the  ten-year  period,  —  that  is  to  say,  fifty  dollars  will  go  to  replace 
the  purchase  price  of  the  plow  ;  the  other  fifty  dollars  is  surplus. 
This  and  this  alone  is  interest,  and  a  rather  high  rate  of  inter- 
est, namely,  10  per  cent.  But  if  every  farmer  is  likewise  disin- 
clined to  wait,  the  market  for  plows  will  be  limited.  Only  as 
many  will  be  purchased  as  will  yield  a  return  large  enough  to 


THE  COST  OF  CAPITAL  AND  ITS  PRICE        431 

more  than  pay  the  purchase  price.  In  other  words,  farmers  in  gen- 
eral will  get  some  interest  on  that  which  they  invested  in  plows. 

This  may  be  illustrated  by  the  following  diagram. 

Let  us  suppose,  as  in  the  former  diagram,  that  the  number  of  imple- 
ments of  a  certain  kind,  say  plows,  is  measured  along  the  line  AC,  and 
their  marginal  productivity  along  the  line  AE.  In  this  case,  however,  we 
mean  their  total  marginal  product  during  their  average  lifetime,  or  that 
amount  which  an  average  plow  will  add  to  the  product  of  the  community 
during  its  lifetime,  over  and  above  what  could  be  produced  without  it.  To 
distinguish  this  from  the  marginal  product  per  year,  we  shall  call  it  the 
total  earnings  of  a  plow. 
Letting  the  descending 
curve  represent  the  de- 
cline in  the  total  earn- 
ings of  each  plow  as  the 
number  of  plows  in- 
creases, the  line  DB,  or 
AF,  would  represent  the 
total  earnings  of  each 
plow  when  their  number 
was  represented  by  the 
line  AD*  When  their 

number  is  AH,  the  total  earnings  of  each  would  be  HB',  or  AF' ;  and 
when  the  number  is  AH',  the  total  earnings  of  each  would  be  H'B", 
or  AF" .  Let  us  further  suppose  that  the  cost  of  making  plows  is  repre- 
sented by  the  perpendicular  distance  of  the  various  points  on  the  ascend- 
ing curve  GB'  above  the  base  line  AC.  If  this  cost  were  the  only  check  on 
the  production  of  plows,  there  is  no  reason  why  they  should  not  increase 
to  the  point  H,  where  the  total  earnings  of  each  plow  would  just  pay 
the  cost  of  making  the  most  expensive  part  of  the  total  supply.  They 
would  sell  at  the  uniform  price  of  D ' B ',  or  AF',  which  would  be  their 
normal  equilibrium  price.  The  total  earnings  of  a  plow  would  then  just 
cover  the  price  which  the  buyer  would  have  to  give  for  it.1 

Why  the  present  value  of  a  productive  agent  is  less  than 
the  future  value  of  all  its  products.  Now,  as  a  matter  of  fact, 
people  do  not  like  to  wait.  Waiting  is  to  some  quite  as  irksome 


F 

r 

Q 

^  B 

B' 

\ 

"""x^ 



^^^ 

D       D'      D' 


1  T.  N.  Carver,  The  Distribution  of  Wealth,  pp.  226-227.    Tne  Macmillan 
Company,  New  York. 


432          PRINCIPLES  OF  POLITICAL  ECONOMY 

as  working.  It  is  also  quite  as  necessary  to  efficient  production. 
Anything,  whether  it  be  working,  waiting,  or  risking,  which 
is  necessary  to  efficient  production,  and  which  at  the  same 
time  is  irksome,  must  be  paid  for.  The  fact  that  it  is  neces- 
sary for  production  furnishes  a  sufficient  motive  for  paying  for 
it ;  the  fact  that  it  is  irksome  makes  it  necessary  to  pay  for  it, 
because  men  will  not  otherwise  perform  this  function.  In 
order  that  'there  may  be  an  adequate  supply  of  tools,  which  is 
necessary  for  efficient  production,  there  must  be  waiting.  Labor 
must  be  performed  in  the  making  of  the  tools,  and  then  some- 
body must  wait  until  they  have  been  used  for  a  number  of 
years  in  order  to  get  back  from  their  use  the  equivalent  of  that 
which  was  originally  expended  in  making  them.  If  the  laborers 
who  make  the  tools  are  not  themselves  willing  to  wait,  they 
may  sell  them  to  someone  else,  who  then  undertakes  to  wait 
for  their  products  to  mature.  If  both  the  laborers  who  make 
the  tools  and  the  one  who  purchases  them  are  disinclined  to 
wait,  their  market  price  will  have  to  be  something  less  than 
the  sum  of  their  future  earnings.  The  laborers,  being  disin- 
clined to  wait,  will  be  willing  to  sell  for  a  cash  price  somewhat 
lower  than  the  total  sum  of  the  future  earnings,  and  the  pur- 
chaser will  not  be  willing  to  pay  a  price  which  would  equal 
the  sum  total  of  the  future  earnings.  In  the  price-making 
process,  therefore,  the  capital  goods  must  necessarily  sell  for 
less  than  the  sum  of  the  future  earnings.  The  buyer  who 
holds  them  during  their  lifetime  finds  himself  in  possession  of 
a  surplus,  which  is  his  compensation  for  waiting. 

Take  the  case  of  a  blacksmith  who,  by  his  own  labor,  makes  a  plow 
out  of  materials  which  cost  him  five  dollars.  Let  us  suppose  that  he  can  in 
a  fortnight  make  a  plow  which  will  earn  a  total  of  thirty  dollars  during 
its  lifetime  of  ten  years.  Deducting  the  cost  of  materials,  this  leaves  him 
twenty-five  as  the  net  earnings  of  his  fortnight's  work ;  but  he  must  wait 
for  his  wages,  receiving  them  in  installments  over  a  period  of  ten  years. 
If  he  does  not  mind  waiting,  this  will  be  no  drawback,  and  he  would  just 
as  lief  make  a  plow  as  work  for  the- same  amount  in  cash  or  in  present 
consumable  goods.  Or,  having  made  such  a  plow,  he  would  not  sell  it 


THE  COST  OF  CAPITAL  AND  ITS  PRICE        433 

for  less  than  thirty  dollars,  the  total  amount  which  it  will  be  expected  to 
earn  during  its  lifetime. 

But  if  he  does  mind  waiting,  and  would  much  prefer  to  receive  his 
wages  at  once,  he  would  not  make  plows  at  all  so  long  as  he  could  earn 
twenty-five  dollars  per  fortnight  in  present  consumable  goods.  Or,  having 
made  a  plow  which  will  earn  thirty  dollars  in  the  course  of  its  lifetime, 
he  would  be  willing  to  sell  it  for  less  than  that  amount,  which,  counting  out 
the  cost  of  the  raw  materials,  would  net  him  less  than  twenty-five  dollars 
for  his  work.  If  no  blacksmith  could  be  found  willing  either  to  wait  ten 
years  for  his  wages  or  to  accept  less  than  twenty-five  dollars  for  the  amount 
of  work  necessary  to  make  a  plow,  no  ploughs  with  such  small  earning 
capacity  would  be  made  unless  someone  else  could  be  found  who  did  not 
mind  waiting  and  who  would  therefore  be  willing  to  pay  thirty  dollars  for 
a  plow  and  then  wait  ten  years  to  get  his  money  back.  But  if  no  such 
person  could  be  found,  the  making  of  plows  would  stop  until  their  growing 
scarcity  raised  their  marginal  productivity  and  their  total  earnings  somewhat 
above  thirty  dollars.1 

Though  it  is  not  likely  that  anyone  would  be  willing  to 
wait  ten  years  to  get  his  money  back,  he  might  be  willing 
to  wait  if  he  could  get  back  not  only  the  original  sum  of 
money  but  a  surplus  besides.  The  farmer,  for  example, 
might  be  willing  to  pay  thirty  dollars  for  a  plow  which  would 
in  the  course  of  ten  years  earn  him  fifty  dollars.  The  twenty 
dollars  surplus  would  be  interest.  The  problem,  as  it  presents 
itself  to  the  farmer  who  is  contemplating  investing  money  in 
a  plow,  is  very  much -the  same  as  the  problem  which  presents 
itself  to  a  lender  who  is  contemplating  lending  money  to  some- 
one else.  As  a  rule  he  prefers  to  keep  his  money  rather 
than  lend  it,  unless  he  can  get  a  surplus  by  lending  it.  Every 
form  of  investment  involves  the  same  problem.  The  investor 
is  compelled  to  give  up  something  in  the  present  —  that  is, 
either  money  or  the  opportunity  to  spend  money  for  present 
goods  —  in  order  that  he  may  have  the  means  of  securing  the 
money  or  goods  at  some  time  in  the  future.  The  disinclination 
which  is  generally  felt  toward  waiting  is  such  that  men  will 

1  T.  N.  Carver,  The  Distribution  of  Wealth,  pp.  229-230.  The  Macmillan 
Company,  New  York. 


434          PRINCIPLES  OF  POLITICAL  ECONOMY 

not,  as  a  rule,  invest  and  wait  unless  there  is  a  chance  to  get  a 
surplus.  The  surplus  is  then  in  a  sense  the  reward  for  waiting. 

It  is  not  to  be  assumed  that  there  is  anything  inherently 
meritorious  in  waiting  merely  for  the  sake  of  waiting.  The 
only  merit  there  is  in  the  process  is  in  the  increased  produc- 
tion which  comes  through  the  use  of  effective  tools  and 
equipment.  Since,  furthermore,  one  cannot  provide  one's  self 
with  effective  tools  and  equipment  without  waiting  or  inducing 
somebody  else  to  wait,  we  have  a  sufficient  reason  why  waiting 
should  be  paid  for  when  it  results  in  increased  production. 
If  it  does  not  normally  result  in  increased  production,  there 
is  no  reason  for  waiting  and  therefore  no  reason  why  it  should 
be  paid  for. 

Not  all  waiting  is  irksome.  While  it  is  true  that,  as  a  general 
rule,  men  are  disinclined  toward  waiting  (that  is,  they  prefer 
present  to  future  goods),  still  there  is  a  certain  amount  of 
waiting  which  takes  place  normally  without  any  great  amount 
of  sacrifice,  and  which  therefore  does  not  need  to  be  paid  for. 
There  would  be  some  saving  even  if  no  interest  could  be 
secured  on  savings.  In  fact,  it  is  probable  that  a  considerable 
amount  of  saving  would  take  place  even  if  men  were  com- 
pelled to  hire  vaults  or  storage  places  in  which  to  keep  their 
savings.  In  this  case  savings  could  be  said  to  yield  negative 
interest  rather  than  positive  interest. 

In  so  far  as  it  is  true  that  men  estimate  present  consump- 
tion higher  than  future  consumption,  it  applies  only  to  the 
consumption  of  corresponding  or  similar  increments  of  income. 
A  man  with  a  large  income  may  be  said  to  derive  less  utility 
from  the  last  dollar  of  his  income  than  from  the  others ;  or, 
to  put  it  in  another  form,  he  can  lose  one  dollar  of  his 
income  with  comparatively  little  feeling  of  loss  or  sacrifice, 
but  if,  with  the  same  general  scale  of  wants,  his  income  were 
much  smaller,  then  the  loss  of  a  dollar  would  be  more  keenly 
felt.  If  his  income  is  very  large,  he  may  find  it  difficult  to 
spend  it  all  on  present  consumption.  In  this  case  it  may  be 


THE  COST  OF  CAPITAL  AND  ITS  PRICE        435 

easier  to  save  it  than  not  to  gave  it.  To  invest  a  little  of  one's 
large  income,  therefore,  involves  no  cost  or  sacrifice  whatsoever. 

On  the  other  hand,  anyone  who  is  gifted  with  a  moderate 
degree  of  foresight  will  look  ahead  and  consider  the  possibil- 
ities of  future  emergencies.  He  may  therefore  lay  up  for  a 
rainy  day,  for  sickness,  or  for  old  age,  even  though  there 
is  no  possibility  whatever  of  securing  interest  on  his  sav- 
ings. If  one  who  has  a  large  present  income  foresees  the 
possibility  that  at  some  future  time  his  income  may  be  cut 
off,  he  may  reason  somewhat  as  follows  :  "I  can  spare  the 
few  unimportant  luxuries  which  the  last  hundred  dollars  of 
my  income  will  buy,  without  any  appreciable  sacrifice.  At 
some  future  time  this  hundred  dollars  might  supply  my  most 
pressing  needs,  if  I  should  find  myself  some  day  without 
an  income.  Therefore  it  will  be  very  much  better  if  I  save 
this  hundred  dollars,  and  lay  it  up  against  that  day,  than 
if  I  consume  it  now."  Another  person,  with  a  smaller  in- 
come, would  reason  in  the  same  way,  though  the  sum  which 
he  would  lay  up  would  be  smaller.  And  a  person  with  a 
larger  income  would  likewise  reason  in  the  same  way,  though 
the  sum  which  he  would  lay  up  would  be  larger.  Taking  the 
whole  community,  especially  if  it  contains  a  great  many  well- 
to-do  people,  a  considerable  mass  of  wealth  would  be  saved 
for  this  reason  alone.  This  kind  of  saving  may  be  said,  there- 
fore, to  involve  no  cost ;  and  yet  those  who  save  in  this  way 
are  able  to  secure  interest  on  their  savings,  along  with  those 
who  save  at  considerable  sacrifice. 

Some  capital  accumulated  without  expectation  of  interest. 
If  those  sums  which  are  saved  in  this  way  without  sacrifice 
were  sufficient  to  meet  the  demands  of  all  communities  for 
capital,  such  a  thing  as  interest  would  not  exist ;  that  is  to 
say,  if  so  much  were  saved  in  this  way,  and  there  were  so  few 
opportunities  for  using  capital  as  to  reduce  the  marginal  pro- 
ductivity of  capital  to  the  minimum  point,  capital  would  practi- 
cally be  a  drug  on  the  market.  If,  however,  the  opportunities 


436  PRINCIPLES  OF  POLITICAL  ECONOMY 

for  the  productive  use  of  capital  are  so  great  that  more  capital 
is  demanded  than  can  be  saved  without  cost,  then,  in  order 
to  induce  further  saving,  a  surplus  must  be  paid  for  its  use. 

Interest  a  part  of  the  general  law  of  value  and  price. 
The  price  which  is  paid  for  the  use  of  capital  comes  under 
the  same  law  as  the  price  which  is  paid  for  anything  else. 
In  the  chapter  on  Scarcity  it  was  pointed  out  that  some  goods 
are  produced,  under  certain  circumstances,  practically  without 
cost.  Trout,  where  the  fishing  is  good,  are  caught  for  the 
pleasure  of  the  sport.  If  the  number  of  trout  that  can  be 
caught  for  pleasure  is  sufficient  to  satiate  the  desire  for  trout, 
then  trout  commands  no  price  ;  if  this  quantity  is  not  sufficient 
to  satiate  the  desire,  and  consumers  are  demanding  more,  then 
they  must  begin  to  pay  a  price  to  induce  other  fishermen  to 
undertake  the  work  of  providing  an  adequate  supply.  The 
law  here  is  the  same  as  that  which  controls  capital.  Some 
capital  will  be  accumulated  without  cost.  There  is  probably  no 
community  in  existence,  however,  in  which  enough  capital  to 
supply  all  demands  is  provided  in  this  way.  It  is  therefore 
necessary  for  all  who  need  it  to  offer  a  price  in  order  to  in- 
duce a  larger  volume  of  saving  than  would  take  place  if  no 
interest  were  paid,  —  that  is,  no  price  for  the  use  of  capital. 

The  cost  of  saving  is  like  other  forms  of  cost,  ultimately  a 
matter  of  psychology.  Among  people  who  are  gifted  with 
a  large  degree  of  forethought,  saving  is  less  irksome  than  it 
is  among  people  who  live  mainly  in  the  present.  Among 
people  of  the  latter  class  very  little  saving  will  take  place 
unless  there  is  a  distinct  reward  for  it.  Among  people  of  the 
former  class  a  great  deal  of  saving  would  take  place  even  if 
there  were  no  reward.  A  community  with  little  forethought 
is  therefore  always  a  community  in  which  interest  rates  are 
high,  because  there  will  be  small  accumulations  of  capital  and, 
the  supply  being  small,  there  is  great  need  for  more.  It  is 
the  need  for  more  of  a  thing  which  induces  people  to  pay  a 
price  for  it. 


THE  COST  OF  CAPITAL  AND  ITS  PRICE       437 

The  functional  theory  of  interest.  This  theory  of  interest 
may  be  called  a  functional  theory  of  interest,  to  correspond 
with  the  functional  theory  of  value  and  the  functional  theory 
of  wages,  which  have  already  been  outlined.  The  function  of 
a  high  price,  as  has  been  pointed  out,  is  to  call  forth  a  larger 
supply ;  the  function  of  high  wages  is  to  induce  a  larger  sup- 
ply of  the  labor  which  receives  high  wages ;  and  the  function 
of  a  high  rate  of  interest  is  to  call  forth  a  larger  supply  of 
capital  for  which  interest  is  paid.  A  community  that  needs 
more  capital  can  get  it  only  by  inducing  larger  savings.  These 


X\ 

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COST  OF  PRODUCTION 

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larger  savings  may  be  secured  either  by  compulsion  (that  is, 
by  taking  a  part  of  the  social  income  by  authority  and  setting 
it  aside)  or  by  attraction  (that  is,  by  offering  a  reward  for  saving). 
There  is  no  other  possible  way  that  has  ever  been  suggested, 
even  on  paper,  of  accomplishing  this  necessary  result. 

Let  us  assume  that  the  amount  of  a  certain  kind  of  capital  is  measured 
along  the  line  AC,  and  its  marginal  productivity  along  the  line  AE,  the 
descending  curve  EC  representing  the  decline  in  the  marginal  productivity 
as  the  supply  increases.  If  there  were  nothing  to  check  its  production 
but  the  cost  of  producing  it,  the  supply  would  normally  increase  to  the 
point  Z7,  where  the  marginal  product  would  just  cover  the  marginal  cost, 
and  there  would  be  no  interest.  This  point  is  located  by  the  intersection  of 
the  cost  curve  GB'  with  the  productivity  curve  EC.  But  in  addition  to  the 


438 

cost  of  production  there  is  the  disadvantage  or  sacrifice  of  waiting.  The 
effect  of  this  is  illustrated  by  the  rising  curve  HB.  This  curve  represents, 
by  its  distance  above  or  below  the  cost  curve  GB,  the  positive  or  negative 
sacrifice  of  saving  the  different  parts  of  the  supply  of  capital.  Where  this 
curve  is  below  the  cost  curve,  it  means  that  there  is  an  advantage  rather 
than  a  disadvantage  connected  with  the  exchange  of  present  for  future 
goods  which  saving  implies.  Where  this  curve  coincides  with  the  cost 
curve  there  is  neither  advantage  nor  disadvantage  connected  with  saving, 
but  when  it  rises  above  the  cost  curve  there  is  a  disadvantage  connected 
with  saving  which  becomes  a  check  upon  the  production  of  capital  in 
addition  to  that  effected  by  the  cost  of  producing  it. 

If  the  production  of  capital  should  stop  at  the  point  K,  where,  as  shown 
by  the  intersection  of  the  abstinence  curve  HB  with  the  cost  curve  Off, 
there  is  neither  advantage  nor  disadvantage  connected  with  saving,  its 
marginal  productivity  would  be  represented  by  the  line  KL.  This  would 
give  its  owner  an  advantage  far  in  excess  of  any  disadvantage  connected 
with  its  production,  and  this  would  stimulate  its  further  production.  But 
in  order  to  increase  its  production  it  would  be  necessary  to  do  more  wait- 
ing as  well  as  more  work.  From  this  point  on,  further  waiting  begins  to 
be  burdensome,  acting  as  a  positive  check  upon  production.  The  normal 
tendency  would  be  for  capital  to  increase  up  to  the  point  Z>,  where  the 
combined  disadvantage  of  working  and  waiting,  or  of  cost  of  production 
and  abstinence,  would  be  just  compensated  by  the  marginal  productivity  of 
that  kind  of  capital.  At  this  point  the  marginal  productivity  would  be 
represented  by  the  line  DB,  the  marginal  cost  of  production  by  the  line 
£>/,  and  the  marginal  abstinence  by  the  line  IB.  The  total  present  value 
of  that  kind  of  capital  would  then  be  represented  by  the  parallelogram 
ADIF'.  The  total  product  of  the  present  supply  of  capital  during  its 
lifetime  would  be  represented  by  the  parallelogram  A  DBF,  and  the  total 
surplus,  or  interest,  by  the  parallelogram  F'IBF. 

THE  PURCHASER'S   DEMAND  FOR   AGENTS  OF   PRODUCTION 

The  same  result  is  reached  by  approaching  the  subject  from  the  side  of 
demand,  and  regarding  the  disadvantage  of  waiting  as  reducing  the  pur- 
chaser's demand 1  for  capital  instead  of  checking  its  supply.  It  is,  generally 
•speaking,  the  amount  which  purchasers  will  pay  for  it  which  constitutes 
the  reward  of  the  makers  of  capital  and  serves  as  an  inducement  to  con- 
tinue the  work  of  production.  So  long  as  the  purchaser's  demand  will  give 
plows,  for  example,  a  price  equal  to  the  cost  of  producing  them,  the 

1  As  distinguished  from  the  borrower's  demand. 


THE  COST  OF  CAPITAL  AND  ITS  PRICE        439 


producers  will  continue  their  work.  As  already  pointed  out,  if  there  were 
no  disadvantage  connected  with  saving,  men  might  be  expected  to  pay  as 
much  in  cash  for  a  piece  of  capital  as  they  expect  it  to  return  them  in  the 
way  of  income  during  its  lifetime.  In  that  case  the  purchaser's  demand 
curve  for  capital  would  coincide  with  the  productivity  curve  of  the  fore- 
going diagram.  There  would  then  be  an  equilibrium  of  supply  and  demand 
at  the  point  where  the  demand-productivity  curve  EC  intersects  the  cost 
curve  GR.  But  since  there  is  a  certain  disadvantage  connected  with 
saving,  and  men  are  not  always  willing  —  not  even  those  who  inveigh 

H 


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V 


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\  ^  B 

\ 

^_ 

\ 

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INTEREST 

\ 

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\ 

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TOTAL  PRESE 

NT 

N 

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VALUE  OF  CAI 

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against  interest  on  capital  —  to  pay  as  much  in  cash,  or  present  consumable 
goods,  for  a  piece  of  capital  as  it  will  produce  during  its  lifetime,  the  pur- 
chaser's demand  curve  does  not  coincide  with  the  productivity  curve,  and 
the  equilibrium  of  demand  and  supply  is  reached  at  some  other  point. 

This  way  of  approaching  the  problem  may  be  illustrated  by  means  of 
the  above  diagram,  which  is  a  modification  of  the  diagram  on  page  437. 
The  purchaser's  demand  for  capital  is,  in  this  case,  represented  by  the 
descending  curve  HM,  which  bears  the  same  relation  to  the  productivity 
curve  EC  as  the  abstinence  curve  HB  bore  to  the  cost  curve  GR  in 
the  last  diagram.  Where  this  demand  curve  is  above  the  productivity 
curve,  it  means  that  men  are  so  anxious  to  provide  against  the  uncertainties 
of  the  future  that  they  will  give  a  larger  number  of  present  goods  for  the 


440          PRINCIPLES  OF  POLITICAL  ECONOMY 

sake  of  having  a  smaller  number  at  some  time  in  the  future,  or  that  men 
of  enormously  large  incomes  would  have  so  much  trouble  trying  to  consume 
them  all  that  they  would  rather  invest  a  part  in  some  enterprise  for  the 
sport  of  carrying  it  through,  even  though  they  may  never  get  all  their 
money  back,  while  men  of  moderate  incomes  would  rather  provide  against 
a  rainy  day  than  to  consume  all  their  incomes,  even  though  their  savings 
shrink  in  the  interval.  Yet  if  the  enterprises  return  a  surplus,  and  the 
savings  expand,  both  classes  of  savers  will  take  advantage  of  the  possibility 
of  getting  an  increase.  Where  the  demand  curve  coincides  with  the  pro- 
ductivity curve,  it  means  that  there  is  neither  advantage  nor  disadvantage 
connected  with  saving ;  and  where  the  demand  curve  falls  below  the 
productivity  curve,  it  means  that  there  is  a  disadvantage  connected  with 
saving,  and  therefore  less  will  be  paid  for  a  piece  of  capital  than  it  will 
earn  in  the  future. 

Under  these  conditions  the  equilibrium  of  demand  and  supply,  which 
determines  the  present  selling  value  of  agents  of  production,  would  be 
reached  when  the  supply  of  capital  was  represented  by  the  line  AD,  for 
this  would  be  the  point  where  the  purchaser's  demand  for  the  different 
forms  of  capital  would  give  them  a  value  just  equal  to  their  marginal  cost 
of  production.  Yet  the  marginal  productivity  of  that  amount  of  capital 
would  be  represented  by  the  line  DB ;  the  present  selling  value  of  capital, 
which  is  equivalent  to  the  present  value  of  its  future  product,  would  be 
represented  by  the  line  DI\  and  the  surplus  which  would  come  to  the 
buyer  who  took  it  at  its  present  selling  value  and  waited  for  its  earnings 
to  mature  would  be  represented  by  the  line  IB.  The  total  present  value 
of  all  now-existing  capital  would  be  represented  by  the  parallelogram 
ADF'I;  its  total  future  earnings,  computed  on  the  basis  of  its  marginal 
productivity,  by  the  parallelogram  ADFB ;  and  the  total  interest  or  surplus 
which  would  come  to  those  who  buy  the  capital  at  its  present  value  and 
wait  for  its  product  to  mature  would  be  represented  by  the  parallelogram 
F'IFB.  The  annual  interest  would  have  to  be  computed  by  dividing  this 
gross  amount  by  the  average  lifetime  of  the  now-existing  capital.  This 
would  give  the  lump  sum  going  as  interest  to  the  owners  of  capital  each 
year.  The  annual  rate  of  interest  would  have  to  be  computed  by  find- 
ing what  percentage  the  annual  interest  is  of  the  total  present  value  of 
the  capital.1 

1  T.  N.  Carver,  The  Distribution  of  Wealth,  pp.  242-249.  The  Macmillan 
Company,  New  York. 


CHAPTER  XXXVII 

PROFITS 

What  are  profits?  Profits  may  be  broadly  defined  as  the 
income  of  the  independent  business  man  who  receives  neither 
stipulated  wages,  rent,  nor  interest.  In  a  somewhat  narrower 
sense  they  include  whatever  he  has  left  over  after  he  has 
allowed  himself  interest  on  his  own  capital,  rent  for  his  own 
land,  and  wages  for  his  own  labor.  This  would  seem  to  narrow 
the  meaning  of  profits  down  to  the  reward  for  taking  risk, 
though  risk  must  be  defined  rather  broadly.  The  enterpriser, 
as  the  independent  business  man  may  with  fair  accuracy  be 
called,  is  essentially  the  man  who  undertakes  something  and 
relieves  others  of  a  part  at  least  of  the  risk  which  they  would 
otherwise  have  to  take. 

It  would  be  quite  possible,  for  example,  for  a  group  of  labor- 
ing men  to  borrow  capital,  build  their  own  factory,  and  run  it. 
But  if  they  did  so,  they  would  always  be  in  danger  of  losing 
not  only  what  they  themselves  had  invested,  but  even  their  wages 
for  a  time ;  that  is  to  say,  if  there  should  come  a  bad  season, 
when  the  demand  for  products  fell  off,  they  might  have  to 
work  for  very  low  wages  or  for  none  at  all.  If  some  individual 
or  group  of  individuals  will  undertake  to  run  the  business  for 
them  and  guarantee  them  a  certain  fixed  rate  of  wages,  they 
are  relieved  of  a  part  of  that  risk. 

Profits  as  payment  for  insurance.  Again,  the  men  who 
furnish  the  capital  may  jointly  assume  all  the  risks  of  the 
enterprise.  They  may,  however,  be  in  part  relieved  by  having 
one  individual  or  group  of  individuals  undertake  the  business 
and  guarantee  them  interest  on  their  capital.  In  such  a  case, 
however,  the  enterprisers  usually  have  to  invest  some  of  their 

441 


442          PRINCIPLES  OF  POLITICAL  ECONOMY 

own  capital.  In  such  cases  they,  the  enterprisers,  put  their 
own  capital  in  the  most  hazardous  position.  This  is  virtually 
the  distinction  between  common  stock  and  preferred  stock  in 
a  corporation.  Those  who  own  the  common  stock  take  the 
greater  risk.  So  long  as  the  enterprise  is  running  at  all,  the 
owners  of  the  preferred  stock  must  get  their  interest,  whether 
the  owners  of  the  common  stock  get  anything  or  not ;  but  if 
the  enterprise  is  very  successful,  the  owners  of  the  common 
stock  get  larger  returns  than  the  owners  of  the  preferred  stock. 
These  larger  returns  over  and  above  the  rate  of  interest  will 
be  called  profits. 

The  lure  of  an  enterprise.  In  a  smaller  business,  run,  let  us 
say,  by  an  individual  rather  than  by  a  corporation,  the  individ- 
ual may  borrow  a  part  of  his  capital,  and  in  this  case,  so  long 
as  he  is  in  business  at  all,  he  must  pay  interest  on  what  he 
borrows,  whether  he  has  anything  left  for  himself  or  not.  In 
case  the  business  succeeds  very  well,  he  gets  a  surplus  which 
may  be  called  profit.  The  lender  of  borrowed  capital  gets  no 
more  than  the  stipulated  rate  of  interest.  It  is  the  function  of 
the  independent  business  man  or  the  enterpriser  to  insure  the 
other  participants  in  the  industry  against  at  least  a  part  of 
their  risk.  Any  income  which  the  insurer  gets  over  and  above 
the  normal  rate  of  interest  on  the  capital  which  he  himself 
puts  in  may  be  called  profit.  This  is  the  lure  which  induces 
men  to  undertake  risks  of  this  kind. 

This  suggests  a  functional  theory  of  profits  which  fits  in 
with  the  functional  theories  of  value,  wages,  and  interest 
already  described  in  the  previous  chapters.  The  function  of 
high  profits  is  to  induce  a  larger  number  of  men  to  undertake 
independent  enterprises.  Where  a  larger  number  of  such 
enterprises  are  needed,  there  are  only  two  ways  of  getting 
them  started.  One  is  for  the  community  as  a  whole  to  take 
a  part  of  the  social  income  and  by  authority  invest  it  in  new 
enterprises ;  the  other  is  to  offer  a  special  inducement  to  pri- 
vate individuals  to  undertake  the  new  enterprises  voluntarily. 


PROFITS  443 

This  is  usually  done  by  the  offer,  on  the  open  market,  of  high 
prices  for  the  products  of  the  enterprise. 

Necessity  of  taking  risk.  Risk-taking  is  no  more  meritorious 
in  itself  than  is  waiting  or  working.  It  is  meritorious  only 
when  it  results  in  increased  production  and  well-being.  Still, 
the  well-being  of  society  or  the  increased  production  of  the 
goods  which  society  needs  makes  it  absolutely  necessary  that 
some  risks  should  be  taken.  Risk  is  therefore  something  which 
cannot  be  avoided.  These  risks  are  of  many  kinds  and  degrees. 
The  tastes  of  the  people  may  change  so  that  the  product 
which  is  to  be  produced  may  be  no  longer  desired.  Some 
new  invention  may  render  obsolete  the  processes  used  and 
the  machinery  which  has  been  installed.  Strikes,  insurrections, 
wars,  and  unforeseen  physical  calamities,  such  as  fires,  storms, 
and  earthquakes,  must  also  be  taken  into  account.  It  would 
be  very  difficult  to  imagine  any  productive  undertaking  that 
did  not  involve  risk.  In  the  case  of  the  farmer,  bad  weather, 
insect  pests,  and  diseases  of  all  kinds  threaten  to  decrease  or 
destroy  his  income.  Risk-taking  is  therefore  as  necessary  as 
working  or  waiting  in  order  to  get  effective  production 
under  way. 

Irksomeness  of  risk.  Unless,  however,  risk-taking  were  in 
some  way  irksome  or  disagreeable,  it  would  not  deter  men 
from  entering  business,  and  there  would  be  nothing  here  that 
would  have  to  be  paid  for.  That  is  to  say,  if  people  liked  to 
take  risks,  there  would  be  no  hesitancy  in  entering  a  risky 
occupation.  It  would  therefore  not  be  necessary  to  offer  a 
reward  to  induce  men  to  enter  it.  But  since  risk-taking  is 
irksome  or  disagreeable,  since  men  would  rather  not  hazard 
their  accumulations  and  their  present  income,  they  must  be 
paid  something  as  a  lure,  or  attraction,  to  overcome  this  disin- 
clination. The  reason  here  is  precisely  the  same  as  the  reason 
for  paying  wages  or  interest,  or  for  paying  the  price  of  any 
commodity.  The  function  of  price,  in  a  free  country,  is  to 
overcome  the  disinclination  to  work,  wait,  or  to  take  risks. 


444          PRINCIPLES  OF  POLITICAL  ECONOMY 


NOT  ALL  RISK  IS  IRKSOME 

It  is  not  to  be  inferred,  however,  that  all  risk  is  burdensome.  The 
gambling  instinct  is  so  strong  in  some  people  that  they  will  eagerly  hazard 
their  wealth  on  chances  which  they  know  to  be  against  them  purely  for  the 
excitement  of  the  hazard.  Different  individuals  differ  greatly  in  this  par- 
ticular, but  in  general  it  will  be  found  that  small  sums  will  be  risked  on  the 
chance  of  winning  large  ones  more  readily  than  large  ones  will  be  risked  on 
the  chance  of  winning  small  ones,  even  when  the  chances  in  the  latter  cases 
are  more  than  proportionally  superior.  So  great  is  the  preference  for  the 
former  class  of  hazards  that  a  great  many  men  —  one  might  almost  say  the 
majority  of  men  —  will  risk  $i  on  the  chance  of  winning  $1000,  even  when 
it  is  well  known  that  there  are  20001  chances  to  one  against  their  winning. 
That  is  why  lotteries  flourish  where  they  are  not  suppressed  by  law.  But 
very  few  will  risk  $  i  ooo  on  the  chance  of  winning  $  I ,  even  if  they  know 
that  there  are  2000  chances  to  one  in  favor  of  their  winning.  If  a  company 
should  offer  to  sell  2000  tickets  at  $1000  each,  only  one  of  which  was  a 
blank,  all  the  rest  drawing  prizes  of  $1001  each,  it  would  be  making  a 
better  offer  than  any  lottery  ever  has  made  or  ever  could  make;  but  it 
would  probably  not  be  able  to  induce  2000  individuals  to  buy  tickets.  And 
yet  such  a  company  would  be  offering  a  good  risk,  as  risks  go,  and  anyone 
who  kept  on  buying  them  would  gain  in  the  long  run,  though  he  might  lose 
all  his  money  on  the  first  venture. 

DIFFERENCE  BETWEEN  GAMBLING  AND  LEGITIMATE 
RISK-TAKING 

Things  are  happening  all  around  us  every  day  which  cannot  be  foreseen. 
We  can  therefore  very  easily  discover  or  invent  ways  of  taking  risk  that 
have  no  connection  whatever  with  production  or  any  kind  of  useful  work. 
Men  may  bet  upon  the  weather,  the  speed  of  horses,  the  outcome  of  an 
election,  the  way  a  flipped  coin  will  fall,  or  which  way  a  cat  will  jump,  but 
in  none  of  these  cases  is  there  anything  accomplished  as  a  result  of  the 
wager,  except  the  transfer  of  money  from  one  person  to  another.  These 
are  pure  gambling  risks  and  have  no  connection  with  any  economic  function. 
The  farmer  takes  risk  when  he  plants  seed.  He  does  not  know  what  the 
weather  will  be,  how  late  the  frosts  will  come  in  the  spring  or  how  early 
in  the  fall,  what  insect  pests  may  destroy  his  crop,  what  thieves  may  steal 
it,  nor  what  other  circumstances,  fair  or  unfair,  may  occur.  Nevertheless, 
if  no  one  were  willing  to  take  such  risks,  we  should  never  have  any  food. 
This  kind  of  risk-taking  cannot  properly  be  called  gambling.  The  manu- 
facturer likewise,  when  he  erects  his  building,  fills  it  with  expensive 


PROFITS  445 

machinery,  and  hires  his  help,  does  not  know  how  soon  a  change  of  fashion 
may  upset  his  calculations,  how  soon  a  strike  may  occur  to  stop  his  produc- 
tion, when  financial  panic  or  industrial  depression  may  cause  his  prospective 
customers  to  stop  buying,  or  when  a  change  of  government  policy  or  some 
other  fortuitous  circumstance  may  send  him  into  bankruptcy.  If  no  one 
were  willing  to  take  such  hazards,  consumers  would  have  no  manufactured 
products,  and  labor  would  have  no  employment.  Such  risk-taking,  again, 
could  not  be  called  gambling.  It  is  absolutely  necessary  to  the  normal  work 
of  production.  In  short,  a  hazard  of  money  or  anything  else  of  value,  on  a 
chance  which  is  not  necessary  to  production,  is  gambling;  a  hazard  on 
work  which  is  necessary  is  not  gambling  but  legitimate  risk-taking. 

ORDINARY  INDUSTRIAL  RISKS   ARE   IRKSOME 

Outside  of  mining  and  a  few  extrahazardous  enterprises,  industrial  and 
commercial  risks  belong  in  the  class  where  relatively  large  sums  must  be 
hazarded  on  the  chance  of  small  gains.  Such  risks  do  not  appeal  to  the 
gambling  instinct,  and  consequently  they  do  not  attract  men  except  where 
the  chances  are  good  in  the  long  run  —  that  is,  where  the  gains,  on  the 
whole,  considerably  exceed  the  losses.  Those  who  embark  on  such  enter- 
prises will,  in  the  long  run,  receive  profits ;  but  in  such  extrahazardous 
enterprises  as  appeal  to  the  gambling  instinct,  by  the  chance  of  large  gains 
from  small  investments,  men  are  so  overanxious  to  invest  that  the  losses, 
on  the  whole,  exceed  the  gains,  and  there  are  no  profits  for  such  men  as  a 
class,  though  of  course  a  few  win  large  prizes.  It  is  in  the  former  class  of 
enterprises  that  the  "  irksomeness  of  risk  "  deters  men  from  embarking, 
reduces  competition,  and  improves  the  chances  of  those  who  have  the 
foresight  or  the  hardihood  to  enter.1 

Relation  of  risk  to  abstinence.  There  is  a  close  parallelism 
between  the  part  played  by  risk  in  the  determination  of  profits, 
by  abstinence  in  the  determination  of  interest,  and  by  cost  pro- 
duction in  the  determination  of  the  price  of  a  reproducible 
commodity.  It  was  pointed  out  in  Chapter  XXXVI,  on  The 
Cost  of  Capital  and  its  Price,  that  the  necessity  of  waiting, 
combined  with  the  fact  that  waiting  beyond  a  certain  point  is 
disagreeable,  tended  to  reduce  the  present  price  of  a  piece  of 
capital  to  something  less  than  the  sum  of  its  future  earnings. 

1  T.  N.  Carver,  The  Distribution  of  Wealth,  pp.  282-283.  The  Macmillan 
Company,  NeW  York. 


446          PRINCIPLES  OF  POLITICAL  ECONOMY 

The  one  who  buys  it  at  its  present  selling  price  and  waits  for 
its  earnings  to  mature  will  normally  and  in  the  long  run  find 
himself  in  the  possession  of  a  surplus  as  the  result  of  his  wait- 
ing. Since  men  are  generally  disinclined  to  waiting,  they  never 
bid  against  one  another  for  the  possession  of  future  goods  vig- 
orously enough  to  raise  their  present  price  to  the  level  of  the 
sum  of  their  future  earnings.  The  result  of  this  is  that  the 
normal  selling  price  of  a  piece  of  capital  is  low  enough  to 
allow  its  purchaser  a  surplus.  In  a  similar  way  the  risk  con- 
nected with  carrying  on  any  enterprise,  particularly  a  new 
enterprise  in  a  changing  society,  may  reduce  the  present  value 
of  the  whole  equipment  somewhat  below  the  probable  value  of 
its  products  even  after  allowance  is  made  for  interest.  Because 
of  the  general  disinclination  to  assume  risks  of  the  kind  ordi- 
narily met  with  in  business,  the  competitive  investments,  that 
is,  the  competitive  buying  of  productive  goods  and  embarking 
on  productive  enterprises  are  less  intense  than  they  would  other- 
wise be.  It  is  for  this  reason  that  those  who  undertake  such 
enterprises  may  be  expected,  in  the  long  run,  to  secure  a  profit 
over  and  above  the  interest  on  the  capital  which  is  invested. 
It  was  also  pointed  out  in  Chapter  XXXVI  that  not  all 
waiting  is  irksome,  and  that  some  waiting  is  done  without 
any  hope  or  expectation  of  surplus  income.  The  parallelism 
between  risk  and  waiting  may  be  carried  a  step  farther.  Not 
all  risk  is  irksome.  Some  risks  are  undertaken  for  the  sake  of 
the  excitement.  Boys  sometimes  like  to  skate  over  thin  ice  just 
because  it  is  dangerous.  Men  sometimes  like  to  gamble  their 
money  just  because  it  is  dangerous.  All  sorts  of  risks  are  taken 
for  the  sheer  excitement  of  the  hazard.  When  you  find  a  busi- 
ness enterprise  which  appeals  to  the  gambling  instinct,  men 
will  be  found  so  eager  to  buy  or  to  invest  in  the  risk  as  to  give 
it  a  market  value  somewhat  greater  than  its  mathematical  or 
economic  value.  Those  who  persist  in  buying  such  risks  invari- 
ably lose  in  the  long  run,  though  they  may  now  and  then  win 
on  some  individual  venture. 


PROFITS  447 

Egotistic  belief  in  luck.  Adam  Smith  long  ago  pointed  out 
that  men  are  not  only  egotistical  regarding  their  own  abilities, 
but  that  generally  they  are  rather  fond  believers  in  their  own 
luck.  Even  though  they  are  convinced  that  mathematically  the 
chances  are  against  them,  their  egotism  leads  them  to  believe 
that  their  own  luck  may  offset  the  effect  of  mathematics.  Of 
all  superstitions  the  belief  in  luck  is  one  of  the  most  wide- 
spread. It  is  this  sort  of  superstitious  egotism  on  which  the 
professional  gambler  and  the  lottery  flourish. 

Relation  of  the  market  to  the  mathematical  value  of  a  risk. 
In  the  case,  however,  of  an  enterprise  which  does  not  appeal 
to  the  gambling  instinct,  men  are  generally  so  reluctant  to 
invest  that  the  market  value  of  the  risk  is  usually  somewhat 
less  than  its  mathematical  value.  Men  who  persist  in  buying 
such  risks  inevitably  gain  if  they  continue  long  enough  and  if 
they  are  not  ruined  by  their  early  losses.  In  the  class  of  risks 
which  appeal  to  the  gambling  instinct,  the  more  one  invests  the 
more  certain  one  is  to  lose.  If  one  were  to  buy  all  the  lottery 
tickets,  one  would  be  absolutely  certain  to  lose,  because  the 
lottery  sees  to  it  that  the  price  of  all  the  tickets  exceeds  the 
value  of  all  the  prizes.  In  the  other  class  of  risks,  namely, 
those  which  do  not  appeal  to  the  gambling  instinct,  the  market 
value  is  less  than  the  mathematical  value,  as  already  stated.  It 
follows  from  this  that  if  you  were  to  buy  all  such  risks,  you 
would  be  absolutely  certain  to  gain,  for  the  sum  total  of  the 
market  values  is  less  than  the  sum  total  of  all  the  mathemati- 
cal or  economic  values.  Those  who  invest  in  the  gamblers' 
risk  as  a  class  lose  rather  than  gain  ;  those  who  invest  in  the 
ordinary  business  risks  as  a  class  gain  rather  than  lose. 

The  question  of  the  residual  share.  In  view  of  all  that  has 
been  said,  it  is  safe  to  conclude  that  profits  are  made  up  of 
what  is  left  after  the  other  shares  are  paid.  This  does  not 
mean,  however,  that  profits  are  a  residual  share.  This  term 
residual  share  has  been  discussed  in  a  good  many  treatises 
on  economics.  By  a  residual  share  is  meant  the  only  share 


448          PRINCIPLES  OF  POLITICAL  ECONOMY 

which  is  not  determined  independently.  It  has  sometimes  been 
argued,  for  example,  that  inasmuch  as  rent  is  determined  by  a 
law  of  rent  which  works  independently  of  other  laws  of  distri- 
bution, and  since  wages  are  determined  by  the  standard  of 
living  which  likewise  is  supposed  to  work  independently  of 
other  laws  of  distribution,  and  since  the  rate  of  interest  tends 
to  work  uniformly  through  the  community,  regardless  of  minor 
changes,  profits  are  therefore  undetermined  by  any  law  but 
are  merely  what  is  left  over  after  the  other  shares  are  accounted 
for.  It  is  quite  as  easy  to  show  that  any  other  share  is  a 
residual  share  in  this  sense  as  it  is  to  show  that  profits  are  a 
residual  share. 

Many  years  ago  Walker  pointed  out  that  profits  are  deter- 
mined by  a  law  similar  to  the  law  of  rent  as  applied  to  land. 
Profits,  according  to  this  law,  are  determined  by  the  difference 
between  the  productivity  of  a  given  business  man  and  that  of 
the  least  efficient  business  man  who  could  manage  to  stay  in 
business.  The  latter  was  called  the  no-profit  business  man  or 
entrepreneur,  and  he  occupied  a  position  analogous  to  the  no- 
rent  land  on  the  margin  of  cultivation.  A  more  efficient  busi- 
ness man,  however,  could  reduce  the  cost  of  production  somewhat 
lower  than  this  no-profits  man,  or  else  produce  a  better  product 
which  would  sell  at  a  higher  price.  Herein  lay  his  opportunity, 
and  his  only  opportunity,  for  profits.  Assuming  that  he  paid 
the  same  rate  of  wages  and  interest  and  a  rent  which  was  pro- 
portional to  the  advantage  of  the  site,  his  only  chance  of  doing 
better  than  the  other  man  was  to  organize  these  factors  more 
effectively  and  to  supervise  them  more  diligently  by  effecting 
economies  which  the  other  man  was  unable  to  effect.  He 
would  then  find  himself  in  the  possession  of  a  surplus.  Be- 
ginning with  profits  and  accounting  for  them  by  this  differen- 
tial law,  Walker  proceeded  to  show  that  rent  and  interest  were 
also  determined  by  definite  laws.  This  left  only  wages  to  be 
accounted  for.  Therefore  he  assumed  that  wages  were  a 
residual  share. 


PROFITS  449 

One  may,  however,  prove  by  the  same  process  that  either 
rent  or  interest  is  a  residual  share.  It  all  depends  on  which 
share  you  consider  last  in  the  series.  The  result  of  this, 
moreover,  has  resolved  the  whole  doctrine  of  a  residual  share 
into  an  absurdity.  Since  the  independent  business  man,  or  the 
entrepreneur,  is  the  only  one  whose  income  is  not  the  result 
of  specific  bargaining,  and  since  he  is  the  only  one  who  does 
not  sell  his  services  for  a  definite  price,  he  may  be  said  to  re- 
ceive whatever  is  left  over.  The  laboring  man  bargains  for  a 
definite  rate  of  wages  ;  whether  the  business  is  making  a  profit 
or  a  loss,  he  gets  these  wages  as  long  as  the  contract  stands. 
The  capitalist  lends  his  capital  at  a  definite  rate  of  interest 
and  gets  that  rate  of  interest  so  long  as  the  business  keeps 
going,  whether  it  is  making  a  profit  or  a  loss.  Similarly  with 
the  landowner.  But  the  entrepreneur  is  the  only  one  whose 
income  hinges  on  the  question  of  profit  or  loss  for  the  business 
as  a  whole. 

The  business  man  the  chief  bargainer.  Every  participant  in 
a  competitive  enterprise  is  more  or  less  a  bargainer,  but  the 
independent  business  man  is  the  chief  bargainer  of  all.  When 
the  laboring  man  has  bargained  for  a  rate  of  wages,  the  rest  of 
his  work  consists  not  in  bargaining  but  in  working ;  and  when 
the  capitalist  has  bargained  for  a  rate  of  interest,  that  is  the 
end  of  his  bargaining ;  so  with  the  landlord.  But  the  inde- 
pendent business  man  is  the  bargainer  per  se ;  he  bargains  for 
everything,  —  his  raw  materials,  his  help,  his  capital,  his  inter- 
est, —  and  he  also  bargains  with  the  purchasers  of  the  product. 
He  is  the  unbought  buyer  of  everything  and  the  unsold  seller 
of  everything  connected  with  the  business.  It  therefore  hap- 
pens that  skill  in  bargaining  is  one  of  the  greatest  elements  in 
his  success  in  securing  profits.  Bargaining,  however,  consists, 
in  the  first  place,  in  investing,  and  the  investment  of  capital 
is  a  very  delicate  operation.  To  invest  successfully  one  must 
foresee  the  future  needs  of  the  community  as  expressed  in  the 
demands  of  the  market.  To  err  at  this  point  is  to  fail. 


450          PRINCIPLES  OF  POLITICAL  ECONOMY 

Because  of  the  disinclination  of  the  average  man  toward 
taking  the  ordinary  business  risk,  the  competition  is  somewhat 
intense  for  the  safe  positions  of  the  laborer  and  the  lender  of 
capital.  The  intensity  of  this  competition  tends  to  keep  their 
shares  somewhat  lower  than  they  would  otherwise  be,  but  this 
disinclination  makes  the  competition  somewhat  less  intense 
among  the  business  men  who  have  to  assume  the  chief  risks. 
This,  in  turn,  leaves  them  with  somewhat  larger  incomes  than 
they  would  get  if  the  risks  were  less  irksome  and  the  competition 
more  intense.  The  surplus  income  which  comes  to  them  in 
this  way  is  called  profits. 


PART  FIVE 
THE  CONSUMPTION  OF  WEALTH 

Which  has  to  do  with  the  utilization  of  wealth  in  the  satisfaction  of  human 

desires,  and  the  reaction  of  this  utilization  upon  the  general  prosperity  and 

strength  of  the  nation 


CHAPTER  XXXVIII 

MEANING  AND  IMPORTANCE  OF  CONSUMPTION 

Two  meanings  of  the  word  consumption.  There  have  been 
two  meanings  given  by  economists  to  the  term  consumption  of 
wealth.  By  one  group  it  has  been  made  to  include  any  utili- 
zation of  wealth  in  which  the  wealth  is  worn  out,  used  up,  or 
destroyed  in  the  process  ;  by  another  group  it  is  denned  as 
meaning  only  such  utilization  as  gives  direct  satisfaction  to  a 
consumer.  Under  the  first  definition  coal  is  consumed  when 
it  is  burned  to  make  steam  for  the  running  of  machinery  as 
well  as  when  it  is  burned  to  supply  warmth  for  the  comfort 
of  the  human  body.  Under  the  second  definition  only  the 
latter  use  of  coal  would  be  called  consumption.  Those  who 
hold  to  the  first  definition  are  compelled  to  divide  consump- 
tion into  two  kinds,  namely,  productive  consumption  and  un- 
productive consumption.  It  is  always  explained,  however,  that 
the  term  unproductive  consumption  does  not  mean  useless  or 
unnecessary  consumption.  It  means  that  wealth  thus  consumed, 
in  contradistinction  to  that  which  is  productively  consumed,  is 
not  used  up  in  the  process  of  producing  other  wealth.  It  is 
used  rather  for  the  final  purpose  for  which  all  wealth  is  com- 
monly supposed  to  be  produced,  namely,  the  direct  satisfaction 
of  human  desires  or  needs.1 

The  tendency  among  recent  writers  is  to  use  the  term  con- 
sumption in  the  narrower  sense.  By  the  consumption  of  wealth 
under  this  definition  is  meant  the  culmination  of  the  whole 
economic  process,  namely,  the  satisfaction  of  human  desires. 
Wealth  which  is  worn  out  or  used  up  in  the  process  of 

1  Compare  the  author's  article  on  "  Consumption "  in  the  Encyclopedia 
Americana. 

453 


454          PRINCIPLES  OF  POLITICAL  ECONOMY 

production  is  not  itself  yielding  satisfaction  to  consumers 
directly.  It  is  yielding  it  indirectly,  or  helping  to  produce 
other  things  which  will  satisfy  consumers  directly. 

The  purpose  of  the  user  is  the  determining  factor.  Under 
modern  conditions  goods  are  used  either  for  direct  satisfaction 
or  for  the  getting  of  an  income.  If  they  are  being  used  for 
the  getting  of  an  income,  they  are  not  being  consumed  in  the 
economic  sense.  The  physician's  automobile  which  is  used  in 
his  profession  is  being  worn  out,  but  it  is  not  being  consumed 
in  this  sense.  When  the  same  automobile  is  used  for  his  own 
enjoyment  or  that  of  his  family,  it  is  being  consumed.  Again, 
a  thing  may  be  in  the  process  of  consumption  even  though  it 
is  being  used  up  very  slowly.  A  diamond  which  is  used  as  an 
article  of  pleasure  or  adornment  is  in  the  process  of  consump- 
tion, even  though  it  may  never  be  really  worn  out ;  but  when 
it  is  a  part  of  the  stock  of  the  jeweler,  like  the  rest  of  his  stock, 
it  is  being  used  for  the  purpose  of  getting  an  income.  A  sub- 
stantial piece  of  furniture,  when  used  for  direct  satisfaction,  is 
being  consumed  ;  but  while  it  is  in  a  furniture  store,  the  imme- 
diate purpose  of  the  owner  is  to  gain  a  profit  from  it  rather 
than  to  enjoy  it,  and  therefore  it  is  not  yet  in  the  process  of 
consumption.  In  short,  the  consumer  of  an  article  is  the  one 
whose  desires  it  satisfies  directly.  The  article  begins  being 
consumed  whenever  it  begins  satisfying  a  consumer's  desires 
directly,  that  is,  when  it  has  passed  through  all  the  channels 
of  business  and  trade,  where  it  is  used  for  the  purpose  of 
getting  an  income,  and  comes  into  the  possession  of  someone 
for  whose  satisfaction  it  is  designed. 

Importance  of  consumption.  Most  textbook  writers  on  eco- 
nomics have  regarded  the  consumption  of  wealth  as  a  depart- 
ment of  the  subject  coordinate  with  such  departments  as 
production,  exchange,  and  distribution.  None  of  them,  however, 
has  given  as  much  space  to  it  as  to  those  other  departments. 
The  reason  has  apparently  been  the  general  opinion  that  con- 
sumption is  essentially  an  individual  matter,  with  which  the  public 


MEANING  AND  IMPORTANCE  OF  CONSUMPTION  455 

has  had  little  or  no  concern.  Laws  relating  to  consumption 
have  been  called  sumptuary  laws,  and  have  generally  been  con- 
demned or  only  half-heartedly  approved.  There  is  a  growing 
opinion,  however,  that  consumption  is  quite  as  important,  from 
its  effect  on  national  prosperity,  power,  and  greatness,  as  any 
department  of  economics.  Even  the  regulation  of  consump- 
tion, as  in  the  case  of  laws  regulating  or  prohibiting  the  use  of 
alcoholic  beverages,  is  becoming  popular.  Probably  no  move- 
ment of  the  present  day  in  America  is  quite  so  popular  or  so 
democratic  as  the  prohibition  movement. 

The  importance  of  the  consumption  of  wealth  is  further 
emphasized  by  the  consideration  that  as  many  and  as  dire 
calamities  have  overtaken  nations  and  peoples  because  of  their 
irrational  habits  of  consumption  as  because  of  inefficient  sys- 
tems of  production,  exchange,  or  distribution.  In  fact,  con- 
sumption reacts  powerfully  upon  all  the  other  departments, 
particularly  upon  distribution.  The  standard  of  living  of  the 
laboring  classes,  which  is  a  part  of  consumption,  has  much  the 
same  influence  upon  the  price  of  their  labor  as  that  exercised  by 
the  cost  of  production  upon  the  price  of  a  material  commodity. 
Again,  the  rate  of  the  accumulation  of  capital,  upon  which  so 
many  things  depend,  is  largely  determined  by  the  habits  of 
consumption.  The  effect  of  luxury  upon  industry  and  general 
national  strength  is  one  of  the  largest  of  all  questions.  These 
illustrations  are  enough  to  show  that  the  subject  of  consump- 
tion deserves  the  most  careful  study  and  the  most  serious 
treatment  which  economists  can  give  it. 

Ratio  of  consumption  to  production.  In  a  profound  and  illu- 
minating article  on  War  and  Economics,1  Dr.  E.  V.  Robinson 
calls  attention  to  the  fact  that  in  any  country,  when  its  produc- 
tion exceeds  its  consumption,  the  result  is  economic  progress, 
but  that  when  consumption  exceeds  production,  the  result  is 
economic  retrogression.  When  production  exceeds  consump- 
tion, wealth  is  accumulating  and  taking  on  durable  forms  ;  when 

1  Political  Science  Quarterly,  Vol.  XV  (December,  1900),  p.  581. 


456          PRINCIPLES  OF  POLITICAL  ECONOMY 

consumption  exceeds  production,  the  national  wealth  shrinks, 
and  the  nation  lives  on  its  accumulated  capital  and,  moreover, 
allows  its  accumulated  fund  of  durable  wealth  to  deteriorate. 
Since  it  spends  no  time  in  keeping  its  durable  wealth  in  repair 
or  its  volume  intact,  but  spends  all  of  its  time  in  producing 
ephemeral  goods  for  immediate  self-gratification,  its  great  archi- 
tectural monuments,  if  it  has  any,  sink  into  decay ;  no  time 
is  spent  in  preserving  them.  Its  buildings  become  dilapidated 
for  the  same  reason.  Its  soil  becomes  depleted  because  no 
energy  is  spent  in  conserving  its  fertility.  The  people  live  as 
it  were  from  hand  to  mouth,  and  everything  tends  downwards. 

When  production  exceeds  consumption,  on  the  other  hand, 
not  only  are  durable  forms  of  wealth  conserved — kept  in  repair 
and  intact  —  but  they  are  continually  improved  and  new  forms 
produced.  There  is  energy  to  spare  from  the  work  of  produc- 
ing ephemeral  articles  for  immediate  consumption.  Here  time 
is  devoted  to  permanent  works  and  new  forms  of  construction. 
Durable  goods  multiply  in  quantity,  capital  accumulates,  more 
and  better  tools  and  equipment  are  provided,  and  productive 
power  accumulates  by  a  kind  of  geometrical  progression. 

Whether,  in  the  nation  at  large,  production  exceeds  con- 
sumption or  not  depends  on  the  general  habits  of  the  average 
person.  If  the  average  person  demands  large  quantities  of 
those  things  which  supply  physical  and  temporary  satisfaction, 
such  as  luxurious  food  and  drink,  fashionable  clothing,  and 
expensive  amusements,  there  will  be  a  tendency  for  consump- 
tion to  exceed  production.  If,  however,  the  average  citizen  is 
satisfied  with  the  kind  of  food  which  nourishes,  and  increases 
strength  and  efficiency,  with  clothing  which  affords  comfort  and 
convenience,  with  amusements  which  are  inexpensive  and  which 
tend  to  preserve  the  health,  strength,  and  agility  of  both  mind 
and  body,  there  will  be  a  tendency  for  wealth  to  accumulate. 

Other  factors  are,  however,  involved.  There  might  be  a 
population  with  simple  habits  such  as  we  have  indicated,  but 
with  no  desire  for  the  durable  satisfactions  of  life  and  with 


MEANING  AND  IMPORTANCE  OF  CONSUMPTION  457 

little  energy  to  be  devoted  to  production.  Such  a  population 
would  necessarily  remain  in  a  low  state  of  civilization.  It  would 
not  provide  abundantly  either  for  the  temporary  or  for  the  per- 
manent means  of  satisfaction,  but  would  remain  in  sloth  and 
squalor.  But  if,  in  addition  to  the  simple  habits  of  consump- 
tion so  far  as  food,  clothing,  and  amusements  were  concerned, 
the  average  person  possessed  an  intense  desire  for  durable 
goods,  —  for  architecture,  libraries,  schools,  and  other  civilizing 
agencies,  — the  conditions  would  be  favorable  to  the  accumulation 
of  wealth  and  to  all  forms  of  economic  progress.  If,  in  addi- 
tion to  all  these,  the  average  person  were  energetic  and  not 
disinclined  toward  work,  —  if  he  were  willing  to  study  hard 
and  work  hard,  and  if  his  motives  were  such  as  to  drive  his 
mind  and  body  at  high  speed,  —  the  conditions  would  be  still 
more  favorable.  This  combination  of  favorable  conditions  would 
make  progress  almost  inevitable.  Nothing  except  a  geological 
cataclysm  or  a  world  war  would  prevent  such  a  people  from 
advancing  in  the  arts  of  civilization. 

Preference  for  durable  goods.  It  is  to  be  borne  in  mind  that 
the  motives  and  desires  of  people  are  fundamental  to  this  prob- 
lem. Any  people  can  have  as  much  progress  and  as  high  a 
state  of  civilization  as  they  desire,  provided  they  desire  them 
strongly  enough  and  are  willing  to  pay  the  price.  If  the  peo- 
ple of  ancient  Athens  had  preferred  to  spend  their  time,  their 
energy,  and  their  money  on  ephemeral  satisfactions  rather  than 
on  the  architectural  adornment  of  their  city,  they  could  have 
done  so.  If  they  had  so  chosen,  they  could  probably,  for  sev- 
eral centuries,  have  consumed  somewhat  more  luxurious  food 
and  drink,  worn  more  expensive  clothing,  and  amused  them- 
selves in  more  costly  ways.  But  because  they  chose  rather  to 
spend  their  money  and  their  energy  on  durable  goods,  they 
left  the  world  richer  than  they  would  have  done  if  they  had 
made  the  ignoble  choice. 

The  same  comment  may  be  made  upon  the  people  of  vari- 
ous medieval  cities,  who  cared  so  much  for  their  religion  that 


458          PRINCIPLES  OF  POLITICAL  ECONOMY 

they  were  willing  to  spend  their  money,  time,  and  energy  in 
building  cathedrals  as  monuments  to  their  religious  faith.  They 
could  have  chosen  otherwise.  They  could  for  centuries  have 
had  more  luxurious  food  and  drink,  adorned  their  bodies  with 
more  expensive  clothing,  and  had  more  of  their  time  for  self- 
amusement.  But  they  did  not  choose  in  this  way,  and  because 
they  did  not,  the  world  still  possesses  their  great  architectural 
monuments.  Similarly,  any  city  of  to-day  can  be  as  fine  and 
beautiful  as  it  wants  to  be,  provided  it  is  willing  to  pay  the 
price.  If  it  chooses  not  to  build  durable  forms  of  satisfaction, 
it  may  go  on  consuming  luxuries  in  many  forms,  and  it  may 
go  on  amusing  itself,  multiplying  holidays,  and  enjoying  vari- 
ous other  forms  of  waste ;  but  if  it  is  willing  to  live  on  the 
products  of  a  part  of  the  people,  in  order  that  the  remain- 
der may  be  employed  in  building  for  the  future,  there  need 
scarcely  be  any  limit  to  its  possibilities  for  civilization  and  cul- 
ture. If  it  chooses  to  follow  the  example  of  those  cities  of  the 
past  that  became  great  and  left  something  to  show  that  they 
once  existed,  —  something  to  justify  that  existence,  —  it  will 
merely  be  choosing  to  consume  from  day  to  day,  and  from  gen- 
eration to  generation,  less  than  it  produces,  in  order  that  a  part 
of  the  productive  energy  of  each  generation  may  build  for  the 
future.  That  spells  progress.  If  it  chooses  otherwise,  it  will 
never  leave  anything  to  show  to  future  generations  that  it  once 
existed,  much  less  to  justify  that  existence.  The  life  history  of 
its  citizens  could  be  briefly  summarized  in  these  words  :  They 
were  born  to  breed  and  die,  like  the  insects  of  the  hour,  gen- 
eration after  generation,  in  endless  and  unprofitable  repetition. 

Value  of  a  man.  From  the  standpoint  of  progress  the  value 
of  the  individual .  depends  on  the  excess  of  his  production  over 
his  consumption.  The  following  formula  will  determine  with 
mathematical  accuracy  how  much  a  person  is  worth  from  the 
standpoint  of  national  prosperity  :  V—  P—  C. 

In  this  formula  V  stands  for  value,  that  is,  the  value  of  the 
man  ;  P  stands  for  his  production ;  C,  for  his  consumption. 


MEANING  AND  IMPORTANCE  OF  CONSUMPTION  459 

Thus  the  formula  reads,  The  value  of  the  man  equals  his 
production  minus  his  consumption.  In  the  cases  where  his 
consumption  exceeds  his  production  his  value  is  negative ; 
he  is  a  drag  on  progress,  and  the  world  will  at  least  save 
his  victuals  when  he  leaves  it. 

The  whole  life  is  the  unit.  Lest  this  be  too  hastily  inter- 
preted, it  should  be  pointed  out  that  a  human  life  as  a  whole, 
and  not  a  fragment  of  it,  should  be  regarded  as  a  unit.  The 
consumption  of  a  child  exceeds  his  production  ;  but  this  does 
not  condemn  him.  So,  likewise,  during  the  declining  years  of 
those  who  reach  a  good  old  age,  consumption  may  exceed 
production  ;  but  this  does  not  condemn  the  life.  If  the  life  as 
a  whole  produces  more  than  it  consumes,  it  leaves  the  world 
richer  by  that  difference. 

Again,  production  should  be  given  a  very  wide  interpre- 
tation. One  may  produce  without  handling  material  goods  of 
any  kind,  but  by  inspiring  the  productive  virtues  in  others, 
by  teaching  productive  skill  to  other  people,  by  scientific  inves- 
tigation, by  transmitting  knowledge,  and  in  various  other  ways. 
If,  after  making  all  allowance  for  these  different  forms  of  pro- 
ductivity, the  mature  individual  in  sound  health  finds  that  he 
is  producing  less  than  he  is  consuming,  it  is  time  for  him  to 
begin  to  consider  his  ways  and  to  experience  a  change  of  heart. 
He  needs  to  be  converted  from  a  waster  into  a  producer. 

Boarders  at  the  national  table.  Dairymen  sometimes  use 
the  term  boarder  to  describe  a  cow  whose  feed  and  care  cost 
more  than  her  milk  is  worth.  Every  wise  dairyman  tries  to 
get  rid  of  his  boarders  and  keep  only  those  cows  whose  produc- 
tion exceeds  their  consumption.  The  formula  V=P—  C  applies 
very  clearly  to  the  value  of  the  cow.  A  wise  farmer  would 
not  keep  a  horse  whose  production  did  not  exceed  his  con- 
sumption. A  manufacturer  would  discard  a  machine  which 
required  so  much  power,  care,  oil,  repairs,  etc.  as  to  exceed 
the  value  of  its  product.  It  would  seem  that  men  ought  to  be 
held  to  at  least  as  high  a  standard  as  that  to  which  cows, 


460          PRINCIPLES  OF  POLITICAL  ECONOMY 

horses,  and  machines  are  held.  A  man  who  falls  below  that 
standard  is  as  much  of  a  drain  upon  his  country  as  is  the  cow, 
horse,  or  machine. 

The  class  of  boarders  includes  not  simply  the  tramps  and 
beggars  but  everyone  else  who  is  not  usefully  engaged,  even 
though  he  or  she  lives  upon  his  wife's  or  her  husband's  earn- 
ings, his  wife's  or  her  husband's  fortune,  or  upon  inherited 
wealth.  The  class  includes  even  others.  Even  those  who  are 
somewhat  usefully  engaged  may  be  consuming  such  expensive 
products,  and  may  require  so  many  servants  to  wait  upon  them, 
as  to  use  up  more  man  power  than  they  replace  by  their  own 
work.  As  a  mere  exercise  in  patriotism,  therefore,  every  ma- 
ture person  should  ask  himself  seriously  whether  the  country  is 
the  gainer  or  the  loser  by  reason  of  his  existence,  whether  the 
cost  of  keeping  him  is  greater  than  the  advantage,  whether 
the  man  power  required  to  produce  for  him  and  take  care  of 
him  is  not  greater  than  the  man  power  which  he  contributes 
to  the  nation's  fund  of  productive  energy  by  his  own  work. 

The  conservation  of  man  power.  The  importance  of  this  con- 
sideration is  peculiarly  clear  at  the  moment  when  this  is  being 
written  (December,  1917),  when  all  the  liberal  nations  are  at 
death  grips  with  a  military  autocracy  whose  limitless  ambition 
threatens  to  overwhelm  the  democratic  world.  The  necessity 
of  conserving  every  ounce  of  our  man  power  is  upon  us.  We 
see  clearly  now  that  anyone  who  is  not  usefully  engaged  is  a 
menace  rather  than  a  help  to  us  in  the  struggle.  The  food 
alone  which  such  a  person  consumes  is  acutely  needed,  to  say 
nothing  of  the  man  power  which  he  requires  in  other  ways. 

Even  those  who  are  usefully  engaged  ought  to  feel  that  luxu- 
rious consumption  on  their  part  is  an  interference  with  the 
plans  and  purposes  of  their  country.  To  consume  unnecessary 
luxuries  is  to  require  an  unnecessary  quantity  of  man  r3ower  to 
produce  for  us.  This  is  little  short  of  a  crime  when  that  man 
power  is  so  intensely  needed  for  the  trenches,  for  the  war 
industries,  and  for  food  production. 


CHAPTER  XXXIX 

RATIONAL  CONSUMPTION 

Difference  between  a  high  and  a  rational  standard  of  living. 
Economists  have  generally  classified  standards  of  living  on  the 
basis  of  their  cost  or  expense.  A  high  standard  of  living  has 
meant  merely  an  expensive  standard  ;  a  low  standard  of  living 
has  meant  simply  a  cheap  standard.  Very  little  attention  has 
been  given  to  the  difference  between  a  rational  and  an  irrational 
standard.  By  a  rational  standard  of  living  is  meant  one  which 
increases  the  margin  between  one's  production  and  one's  con- 
sumption. In  the  formula  V=P—C,  as  given  in  the  pre- 
ceding chapter,  the  most  valuable  man  is  one  in  whom  P 
exceeds  C  by  the  greatest  margin.  The  purpose  of  the  present 
chapter  is  to  contend  that  the  most  rational  standard  of  living 
is  one  which  produces  the  most  valuable  man. 

This  margin  of  difference  between  P  and  C  would  be  in- 
creased, of  course,  either  by  decreasing  C,  by  increasing  P,  or 
by  doing  both  at  the  same  time ;  that  is,  if,  without  reducing 
in  any  degree  a  man's  efficiency  as  a  producer,  he  were  to  re- 
duce his  cost  of  living,  he  would  thereby  be  adding  to  his 
value  from  the  standpoint  of  progress.  To  that  extent  he 
would  enable  the  community  to  produce  more  than  it  con- 
sumed. He  would  thus  be  a  factor  in  the  accumulation  of 
productive  power  or  of  the  durable  products  of  civilization.  If, 
however,  by  reducing  his  cost  of  living,  he  at  the  same  time 
reduced  his  productive  efficiency  in  the  same  proportion, 
there  would,  of  course,  be  no  gain,  and  there  might  be  some 
loss  involved.  If,  on  the  other  hand,  by  spending  more  on 
himself,  especially  on  books  and  other  means  of  education,  on 
tools,  or  on  more  nourishing  food,  he  were  able  to  increase 

461 


462          PRINCIPLES  OF  POLITICAL  ECONOMY 

his  productive  efficiency,  his  increase  in  consumption  would 
more  than  justify  itself. 

From  this  point  of  view  the  problem  for  every  individual 
is  to  adopt  that  standard  of  consumption  which  will  leave  the 
largest  margin  between  production  and  consumption.  From 
the  same  point  of  view  it  would  frequently  be  necessary  that 
one  man  should  spend  more  on  himself  than  another  would  be 
justified  in  doing.  Take,  for  example,  a  great  surgeon,  whose 
time  is  exceedingly  valuable,  not  only  to  himself  but  to  the 
community  he  serves.  He  might  very  properly  keep  an  auto- 
mobile, a  chauffeur,  and  other  time-saving  devices  and  agencies. 
He  might  even  keep  a  valet  to  look  after  his  clothes.  If  these 
forms  of  expenditure  would  enable  him  to  give  more  people 
the  benefit  of  his  skill,  it  would  be  to  their  advantage  for  him 
to  spend  money  in  these  ways.  This  applies  to  all  others 
whose  time  and  services  are  valuable  to  the  community.  For 
the  same  reason  he  might,  by  increasing  his  consumption  in 
various  ways,  increase  his  production  more  than  enough  to  pay 
the  added  cost  of  his  living.  But  an  inexperienced  surgeon, 
whose  time  is  not  valuable  to  the  community,  —  who,  in  fact, 
has  time  to  spare,  —  could  not  properly  indulge  in  the  same 
time-saving  devices.  For  such  a  person  to  employ  a  valet  or 
even  a  chauffeur  would  be  ridiculous  waste  and  ostentation. 

Buying  trinkets  is  not  good  for  business.  In  opposition  to 
this  point  of  view  there  is  a  popular  theory  to  the  effect  that 
lavish  expenditure  is  somehow  good  for  business.  The  diffi- 
culty with  this  argument  is  that  it  always  assumes  that  if  the 
individual  is  not  consuming  lavishly,  he  is  not  spending  but 
hoarding  his  money.  It  is  surely  as  good  for  business  and 
labor  that  one  should  spend  money  on  builders  and  architects 
as  on  milliners  and  confectioners.  He  who  consumes  lavishly 
spends  his  money  on  confectioners,  milliners,  and  other  pro- 
ducers of  immediate  and  temporary  satisfactions.  He  who  con- 
sumes rationally  spends  as  much  money  as  he  who  consumes 
lavishly,  but  spends  it  on  things  which  build  and  improve, 


RATIONAL  CONSUMPTION  463 

rather  than  on  things  which  merely  afford  temporary  gratifi- 
cation. A  community  of  lavish  consumers  would,  of  course, 
give  actual  employment  to  those  whose  work  is  to  amuse  and 
gratify,  but  little  employment  to  builders  and  others  producing 
for  future  generations.  A  community  of  rational  consumers, 
on  the  other  hand,  would  give  more  employment  to  those  who 
build  for  future  generations,  and  less  to  those  whose  work  is 
to  gratify  the  interests  of  the  immediate  present.  There  is  no 
essential  difference  in  the  amount  of  money  spent  in  the  two 
cases,  provided  the  two  have  equal  quantities  of  money  to 
spend.  The  difference  is  in  the  way  they  spend  it  and  in  the 
direction  they  give  to  enterprises  and  industry.  The  com- 
munity that  spends  money  in  building  for  future  generations 
will  improve  from  generation  to  generation  ;  each  generation 
will  inherit  from  the  preceding  one  a  larger  fund  of  durable 
wealth,  and  will  add  to  this  and  bequeath  a  still  larger  fund 
to  successive  generations. 

Buying  durable  goods  is  investing  for  the  future.  If  we 
were  to  start  these  two  communities  side  by  side,  with  equal 
numbers  and  equal  natural  resources  but  with  different  habits 
of  consumption,  it  would  not  be  many  generations  before  a 
marked  difference  could  be  seen  between  the  two  communities. 
The  community  which  spent  its  income  for  immediate  gratifica- 
tion would  fall  behind  the  one  which  spent  a  part  in  building 
for  the  future.  It  would  not  be  many  generations  before  the 
latter  community  would  outstrip  the  former,  and  the  people 
from  the  former  would  be  emigrating  to  find  employment  and 
other  advantages  in  the  latter. 

The  miser  and  the  spendthrift.  Instead  of  placing  the  miser 
and  the  spendthrift  in  opposite  categories,  we  should  really  put 
them  together.  The  miser  is  a  lavish  consumer  in  a  most  im- 
portant sense.  A  consumer  is  defined  as  one  who  uses  wealth 
for  his  immediate  gratification.  In  a  previous  chapter  con- 
sumers' goods  were  defined  as  goods  used  for  direct  and  im- 
mediate satisfaction.  Now  a  miser,  instead  of  using  his  wealth 


464          PRINCIPLES  OF  POLITICAL  ECONOMY 

productively,  keeps  it  for  his  direct  and  personal  enjoyment. 
With  extreme  gratification  he  counts  his  hoard.  He  loves  to 
handle  it,  to  see  it  glitter,  and  to  hear  it  jingle.  He  is  in  the 
strictest  sense  a  consumer  of  gold.  He  is  very  much  like  the 
spendthrift  in  that  he  gives  up  everything  in  order  to  get  gold 
and  to  enjoy  it  personally,  just  as  the  ordinary  spendthrift  gives 
up  everything  for  personal  enjoyment  of  other  kinds.  If,  in- 
stead of  hoarding  his  gold  in  his  cellar,  our  traditional  miser 
were  to  use  it  in  gilding  his  house,  no  one  would  doubt  that  he 
was  a  spendthrift.  Whether  he  hoards  his  gold  in  his  cellar  or 
uses  it  for  purposes  of  adornment  makes  very  little  difference. 
The  same  amount  of  gold  is  withdrawn  from  circulation,  and 
much  the  same  effect  on  the  market  is  produced  in  either  case. 

Both  the  miser  and  the  spendthrift  should  be  contrasted 
with  the  rational  buyer,  or  the  investor  in  durable  goods.  The 
true  investor  buys  goods  of  which  he  himself  will  probably 
never  be  able  to  absorb  the  full  utility.  He  buys  goods  that 
will  last  so  long  that  future  generations  will  get  a  part  of  their 
utility.  Those  future  generations  will  therefore  have  a  better 
start  than  he  did.  If  this  is  kept  up  indefinitely,  generation 
after  generation,  by  all  members  of  the  community,  it  will  be 
a  very  prosperous  and  progressive  community ;  but  if  each 
individual  of  each  generation  merely  says,  "  What  has  posterity 
ever  done  for  me  that  I  should  be  called  upon  to  do  anything 
for  posterity?  Let  us  eat,  drink,  and  be  merry!"  that  will 
always  be  a  backward  community. 

The  case  of  rival  communities.  It  was  suggested  above  that 
if  two  communities  started  side  by  side  with  equal  natural 
advantages  but  with  different  habits  of  spending,  we  might  get 
a  test  of  the  comparative  merits  of  those  habits.  This  may  be 
used  likewise  as  a  means  of  testing,  in  imagination  at  any 
rate,  the  rational  quality  of  a  standard  of  living.  That  standard 
of  living  which  would  enable  a  community  or  nation  to  make 
the  most  rapid  and  permanent  progress  would  have  to  be  com- 
mended. Something  depends,  however,  on  our  definition  of 


RATIONAL  CONSUMPTION  465 

progress.  There  may  be  about  as  many  ideals  of  progress  as 
there  are  people  who  ,have  ideals.  Without  attempting  a  full 
and  complete  definition,  it  would  seem  fairly  safe  to  suggest 
that  among  other  things  progress  should  include  general 
improvement  in  comfort,  well-being,  and  satisfaction. 

The  whole  life  of  the  nation  as  well  as  of  the  individual  to 
be  considered.  Whether  this  form  of  progress  is  worth  what  it 
costs  or  not  is  another  question.  The  individual  spendthrift 
doubtless  thinks  that  his  immediate  satisfaction  is  more  impor- 
tant than  his  future  well-being  or  that  of  his  descendants.  He 
therefore  endangers  his  future  well-being  for  the  sake  of  satis- 
faction in  the  present.  To  him  progress  is  not  worth  the  price. 
The  price  is  present  abstinence.  He  would  probably  not  deny 
that  saving  and  economy  would  make  for  progress,  that  is, 
would  make  him  better  off  in  the  future.  He  would  merely 
say  that  he  did  not  care  for  progress  so  much  as  for  present 
gratification.  So  with  a  spendthrift  nation  ;  it  might  agree  that 
accumulation  of  wealth  and  improvements  in  comfort  and  well- 
being  would  be  characteristic  of  progress  and  that  thrift  and 
economy  would  contribute  to  that  end,  but  it  might  decide  that 
it  did  not  care  so  much  for  progress  as  for  present  gratification. 
A  nation  feeling  this  way  gets  what  it  prefers.  The  future, 
however,  probably  belongs  to  those  individuals  and  those  nations 
which  possess  more  of  the  time  sense,  —  to  those  who  are  able 
to  think  of  the  whole  of  life  as  a  unit  rather  than  of  every 
moment  as  sufficient  unto  itself. 

Leaving  out  of  the  discussion  for  the  present  the  question 
as  to  whether  prosperity  is  worth  while  or  not,  but  assuming 
that  it  is  worth  while,  the  test  which  we  have  suggested  would 
be  a  good  one.  What  standard  of  living,  if  adopted  and  fol- 
lowed persistently,  generation  after  generation,  would  increase 
the  comfort  and  well-being  of  the  community  and  develop  the 
power  to  support  increasing  numbers  of  people  and  support 
them  better,  to  add  to  the  productive  power  of  each  generation, 
and  ultimately  to  raise  the  economic,  social,  political,  and  even 


466          PRINCIPLES  OF  POLITICAL  ECONOMY 

military  strength  of  the  nation  to  the  maximum  ?  Granting 
that  there  are  other  factors  in  the  problem,  we  still  have  the 
right  to  insist  that  the  standard  of  living  is  one  important 
factor.  The  standard  of  living  which  contributes  most  to  prog- 
ress as  we  have  defined  it  is  therefore  to  be  commended.  That 
standard  of  living  will  contribute  most  in  which  the  net  con- 
tribution of  the  average  person  is  the  highest ;  that  is,  where  his 
production  exceeds  his  consumption  by  the  widest  margin. 

Let  us  return  to  the  formula  V=  P—  C.  That  is  the  best 
standard  of  living  which  enlarges  the  value  of  the  average 
person  to  the  maximum. 

It  must  begin  to  appear  that  rational  consumption  is  as 
important  a  factor  in  national  prosperity  as  efficient  production. 
The  relation  between  consumption  and  production  is  even 
closer  than  we  have  yet  shown  it  to  be.  In  a  most  important 
sense  useless  consumption  is  a  waste  of  labor,  or  of  productive 
power.  It  requires  labor,  or  productive  power,  to  produce  every- 
thing which  we  consume.  If  our  consumption  is  such  as  to 
enable  us  to  give  back  an  equal  amount  of  productive  power, 
there  is  no  waste ;  but  if  we  consume  in  excess  of  that  which 
is  necessary  to  maintain  our  working  capacity  at  its  maximum 
efficiency,  the  labor  which  produced  the  things  which  we  con- 
sume in  excess  is  wasted  as  truly  as  though  it  were  badly 
directed  or  were  working  with  crude  and  unsuitable  tools. 

Liberal  ideas  as  to  what  is  necessary.  It  is  well,  however, 
to  be  rather  liberal  in  our  ideas  as  to  what  is  necessary  in 
order  to  maintain  a  man's  working  capacity  at  its  maximum. 
Considerable  recreation  and  relaxation  are  always  recognized 
as  necessary.  The  anticipated  enjoyment,  not  only  of  games 
and  other  forms  of  recreation  but  of  objects  of  comfort  and 
delight,  is  a  spur  to  energy.  It  is  not  only  a  spur  to  energy ; 
it  is  also  a  means  of  creating  and  preserving  a  joyful  frame 
of  mind,  without  which  sustained  effort  is  impossible,  and  with- 
out which  it  is  frequently  asserted  that  no  really  fine  work  of 
any  kind  is  ever  done. 


RATIONAL  CONSUMPTION  467 

Joy  in  work.  Looking  forward  to  a  holiday  or  a  vacation 
has  sustained  many  a  laborer  through  weeks  and  months  of 
study  and  toil.  The  desire  to  possess  a  bicycle  or  an  automo- 
bile has  galvanized  many  an  otherwise  indolent  boy  into  strenu- 
ous productivity.  The  pleasure  of  giving  useless  presents  to 
their  children  at  Christmas  time  has  lightened  the  toil  of  many 
a  father  and  mother  through  many  a  hard  winter.  In  our  at- 
tempts to  define  a  rational  standard  of  living  we  must  not 
overlook  a  multitude  of  things  which  people  want  and  want 
intensely  without  being  able  to  give  any  good  reason  why  they 
want  them.  Women  can  no  more  give  a  reason  why  they  like 
babies  and  finery  than  a  fox  terrier  can  give  a  reason  why  he 
likes  to  chase  cats.  There  is  no  more  certain  way  of  spoiling 
a  boy  than  by  compelling  him  to  give  a  reason  for  everything 
which  he  wants  and  refusing  to  allow  him  to  have  it  unless 
his  reason  is  satisfactory  to  older  people.  It  would  be  equally 
unwise  to  try  the  same  plan  with  grown-ups.  We  must  be 
rather  careful,  therefore,  in  defining  a  rational  standard  of  liv- 
ing, not  to  eliminate  many  things  which  no  one  is  able  to  give 
a  very  good  reason  for  desiring,  but  which,  nevertheless,  are 
desired  with  an  intensity  which  cannot  always  be  expressed. 

Tools  as  consumers'  goods.  The  world  has  undoubtedly  lost 
much,  in  productive  efficiency  as  well  as  in  the  joy  of  living, 
through  its  failure  to  appreciate  the  possibilities  in  the  direction 
of  turning  tools  and  other  producers'  goods  into  consumers' 
goods.  That  one  must  have  good  tools  to  do  good  work  has 
long  been  recognized,  but  we  have  scarcely  begun  to  realize 
the  full  meaning  of  the  term  good  tools.  It  is  not  only  neces- 
sary that  they  be  capable  of  doing  their  purely  mechanical 
work ;  it  is  also  essential  that  they  please  the  mind  of  the 
worker.  They  must  be  pleasing  to  look  upon  as  well  as 
agreeable  to  the  hand. 

The  purpose  of  a  tool  is  to  bridge  the  gap  between  the 
worker  and  the  object  upon  which  he  is  working,  —  to  enable 
him  to  transfer  to  the  object  the  idea  or  plan  which  he  has  in 


468          PRINCIPLES  OF  POLITICAL  ECONOMY 

mind.  It  must  therefore  fit  the  mind  of  the  worker  as  well 
as  his  hand  and  his  arm. 

The  importance  of  having  tools  which  help  to  keep  the 
worker  in  an  agreeable  frame  of  mind  is  not  so  much  in  the 
fact  that  he  can  do  more  or  better  work  in  a  given  minute  or 
a  given  hour,  though  there  is  something  in  that.  The  chief 
importance  lies  in  the  fact  that  he  can  keep  at  it  for  more 
minutes,  more  hours,  more  days,  and  more  years.  Some  rare 
geniuses  are  able  to  work  regularly  and  all  the  time,  "  taking 
infinite  pains  "  and  apparently  never  tiring.  Most  of  us,  how- 
ever, are  desultory  creatures  who  have  to  coax  ourselves  to 
work  steadily.  It  is  easier  to  coax  ourselves  to  work  properly 
if  our  tools  are  such  as  we  delight  to  handle  and  our  workshop 
is  a  place  where  we  delight  to  be. 

Coaxing  ourselves  to  work.  The  writer  remembers  a  vener- 
able farmer  who  seemed  to  be  the  very  embodiment  of  the 
spirit  of  work.  The  habits  of  a  lifetime  had  got  into  his  very 
bone  and  muscle.  Work  seemed  to  be  his  chief  pleasure  and 
idleness  his  chief  pain.  Yet  he  confided  to  the  writer  that  he 
feared  that  he  lacked  the  moral  character  which  was  necessary 
to  set  a  gatepost  properly.  He  knew  that  it  ought  to  be  set 
four  feet  deep,  —  that  if  it  were  set  less  deep  than  that,  the 
gate  would  sooner  or  later  begin  to  sag  and  give  trouble.  Yet, 
when  he  was  actually  digging  the  hole,  he  found  his  courage 
and  his  determination  gradually  weakening.  When  it  was  three 
feet  deep  it  "  looked  deep  enough,"  and  unless  he  rallied  all 
his  moral  force  he  would  stop  somewhat  short  of  the  neces- 
sary four  feet.  As  another  means  of  supporting  his  character 
and  encouraging  himself  to  do  what  he  knew  he  ought  to  do, 
he  never  undertook  to  dig  a  post  hole  unless  he  had  all  his 
tools  in  the  best  possible  shape.  It  was  harder  to  persevere 
with  poor  tools  than  with  good  tools.  A  new  tool  in  which  one 
takes  some  pride  is  a  great  help  in  such  times  of  moral  strain. 

Aside  from  their  effect  upon  the  quantity  and  quality  of  the 
work  which  a  person  can  do,  handsome  tools  contribute  their 


RATIONAL  CONSUMPTION  469 

share  to  the  sheer  joy  of  living.  Those  people  who  are  not 
obliged  to  work  have  the  same  need  as  others  for  pleasing 
effects.  Not  having  any  use  for  tools  or  other  objects  of  utility, 
they  take  to  collecting  useless  objects,  somewhat  after  the 
fashion  of  the  bower  bird.  That  bird,  it  will  be  remembered, 
gathers  bits  of  glass,  colored  string,  broken  china,  bright 
pebbles,  and  spreads  them  before  her  nest,  for  no  purpose, 
apparently,  except  the  pleasure  of  looking  at  them.  Now 
tools  may  be  just  as  beautiful  as  the  greater  number  of  those 
useless  objects  which  people  of  leisure  and  bower  birds  collect 
for  their  own  delectation.  Those  who  work  spend  a  large  por- 
tion of  their  time  with  their  tools  and  in  their  shops,  more  than 
they  are  likely  to  spend  anywhere  else  except  in  their  own 
homes.  Next  to  the  adornment  of  their  homes,  the  adornment 
and  beautification  of  their  working  places  must  furnish  them 
the  pleasure  of  living. 

Pride  in  work.  The  spirit  which  regards  work  as  a  more  or 
less  repulsive  necessity  —  which  tries  to  cover  up  in  many  ways 
the  evidences  of  work  —  is  probably  responsible  for  a  large  part 
of  the  neglect  which  we  have  shown  to  our  working  places. 
Naturally  enough  a  person  who  regards  work  merely  as  a  dis- 
agreeable necessity  —  something  to  be  ashamed  of  and  avoided 
on  every  possible  pretext  —  is  not  likely  to  spend  very  much 
money  on  the  polishing  or  adornment  of  his  tools  or  the  beauti- 
fication of  his  working  place. 

No  rural  neighborhood,  for  example,  is  quite  so  desolate  as 
those  from  which  people  retire  as  soon  as  they  have  accumu- 
lated enough  to  enable  them  to  live  in  town.  Farmers  who  re- 
tire as  soon  as  they  possibly  can  afford  to  do  so  are  not  likely 
to  spend  much  money  in  adorning  their  farmhouses  or  in 
making  the  neighborhood  attractive.  It  is  only  where  you  find 
farmers  who  are  glad  that  they  are  farmers,  —  who  expect  to 
remain  farmers  and  whose  children  look  forward  to  the  same 
career,  —  that  you  find  the  farms,  the  homes,  and  the  community 
adorned  and  embellished  with  the  evidences  of  civilization. 


470          PRINCIPLES  OF  POLITICAL  ECONOMY 

No  town  or  section  of  a  town  is  generally  quite  so  unattractive 
as  the  place  where  the  people  work.  It  has  not  occurred  to 
many  of  the  owners  of  these  working  places  that  the  people 
really  live  there  a  good  portion  of  their  lives,  and  that  if  they 
cannot  get  a  part  of  their  joy  of  living  there,  they  will  miss  a 
good  deal  of  it.  No  doubt  this  is  partly  due  to  the  fact  that 
the  owners  themselves  live  elsewhere.  In  this  respect  a  factory 
district  resembles  a  farming  district  whose  land  is  owned  by 
absentee  landlords.  The  surplus  which  the  land  affords  is  all 
spent  somewhere  else,  —  where  the  owner  lives,  —  in  adorning 
and  embellishing  his  home ;  there  is  none  left  to  adorn  and 
embellish  the  countryside.  Similarly,  the  surplus  which  the 
factory  yields  is  spent  somewhere  else,  usually  as  far  from  the 
factory  as  the  owner  and  his  family  can  get. 

If  it  were  not  for  the  fact,  referred  to  above,  that  we  have 
inherited  certain  aristocratic  traditions  (or  else  that  we  try  to 
ape  those  who  have)  and  are  rather  anxious  to  get  away  from 
the  sources  of  our  incomes,  we  might  find  it  possible,  in  some 
cases  at  least,  to  live  near  our  places  of  business.  If  we  all  did 
so,  we  should  spend  our  money  there  and  should  also,  if  we 
could  afford  it,  beautify  those  surroundings  as  we  now  beautify 
the  suburban  districts  where  we  live. 

It  is  astonishing  how  much  of  the  fashion  of  the  world  is 
due  to  the  desire  to  avoid  the  appearance  of  having  to  work,  or 
even  to  advertise  the  fact  that  one  does  not  have  to  work.  In 
old  times  certain  Chinese  magnates  used  to  allow  the  finger- 
nails to  grow  to  extraordinary  lengths  as  a  visible  sign  that 
they  did  not  have  to  work.  The  binding  of  the  feet  of  the 
girls  is  said  to  have  had  the  same  origin.  The  train,  which 
only  lately  was  a  fashionable  necessity  for  every  lady  in 
Christendom,  answered  much  the  same  purpose. 

Seeing  that  we  have  been  so  anxious  either  to  avoid  work 
or  at  least  to  avoid  the  appearance  of  having  to  work,  it  is  not 
strange  that  we  have  done  very  little  to  make  our  work  agree- 
able. The  opposite  tendency  shows  itself  once  in  a  while, 


RATIONAL  CONSUMPTION  471 

however,  as  in  the  case  of  those  New  England  shoemakers  of 
an  earlier  day  who  cooperated  to  hire  readers  to  read  to  them 
while  they  plied  their  trade.  Such  people  cannot  be  kept 
down.  They  built  up  a  great  shoemaking  industry  in  New 
England.  One  finds  good  workmen  who  delight  in  nice  tools,  — 
tools  with  which  it  is  a  pleasure  to  work,  —  and  who,  if  they 
have  an  opportunity,  adorn  their  shops  with  flowers.  A  good 
farmer  usually  likes  to  work  with  a  handsome  team,  well 
groomed  and  harnessed.  The  team  is  to  him  both  a  consumers' 
good  and  a  producers'  good.  There  is  not  much  doubt  that  such 
a  farmer  works  more  cheerfully  and  more  steadily,  and  that  he 
finds  life  more  enjoyable,  than  he  would  if  he  tried  to  get  along 
with  an  ill-matched,  unattractive  team.  It  is  reasonable  to  sup- 
pose that  we  should  all  do  better  and  more  persistent  work, 
and  get  more  enjoyment  out  of  life,  if  we  took  some  pains  to 
make  the  conditions  of  our  work  attractive.  If  this  is  so,  it  is 
a  matter  of  great  economic  importance  and  one  which  will  con- 
tribute to  the  prosperity,  strength,  and  greatness  of  the  nation, 
and  even  more  to  the  enjoyment  of  the  people.  Expenditure 
for  such  things  would  form  a  part  of  a  rational  system  of  con- 
sumption. But  it  is  important  that  all  such  enjoyable  consump- 
tion should  be  regarded  in  its  true  relation  to  the  problems  of 
the  national  life  upon  which  our  individual  lives  depend  in  the 
long  run.  To  forget  their  relation  to  the  joy  of  work  and  to 
think  of  them  as  ends  in  themselves,  unrelated  to  the  larger 
problems  of  life,  is  to  diminish  our  own  value  to  the  nation  and, 
to  that  extent  at  least,  endanger  the  position  of  our  posterity. 


CHAPTER  XL 
LUXURY 

Different  classes  of  consumers'  goods.  Consumers'  goods 
have  been  divided  into  four  classes,  according  to  the  kind  of 
desires  which  they  are  designed  to  satisfy.  They  are  neces- 
saries, comforts,  decencies,  and  luxuries.  This,  however,  is  at 
best  only  a  rough  classification.  It  may  seem  fairly  easy  to 
distinguish  between  necessaries  and  comforts,  and  there  are 
doubtless  many  cases  where  goods  are  easily  classified  ;  but 
there  are  also  many  line  cases  where  it  is  difficult  to  determine 
whether  the  good  in  question  is  a  necessary  or  a  comfort,  or 
even  a  decency.  Another  difficulty  which  tends  to  obscure  the 
distinction  is  found  in  the  fact  that  no  one,  however  poor,  con- 
fines himself  to  necessaries.  Part  of  his  expenditure  will  go 
for  comforts,  part  for  decencies,  and  part  even  for  luxuries. 
Again,  no  one,  however  rich,  can  avoid  the  buying  of  neces- 
saries and  comforts. 

Necessaries.  In  a  general  way  we  may  define  necessaries  as 
all  goods  which  are  required  for  the  maintenance  of  physical 
health  and  strength,  not  only  of  the  mature  man  but  also  of 
his  family  and  even  of  his  young  children.  In  discussing  what 
used  to  be  called  the  iron  law  of  wages,  it  was  said  that  the 
natural  wages  of  labor  are  made  up  of  those  things  which  are 
necessary  in  order  that  the  laborer  may  maintain  his  health  and 
strength  and  reproduce  his  kind,  so  as  to  maintain  the  supply 
of  labor  without  increase  or  diminution.  Aside  from  the  un- 
warranted use  of  the  word  natural  as  applied  to  this  rate  of 
wages,  it  would  be  impossible  to  say  that  such  wages  would 
consist  entirely  of  necessaries.  It  is  quite  possible  that  the 
laborers  might  demand  luxuries  and  forego  the  gratification  of 

472 


LUXURY  473 

their  domestic  instinct  unless  they  could  get  them.  In  that 
case  wages  would  have  to  be  high  enough  to  provide  the 
laborers  with  these  luxuries  ;  otherwise  they  would  not  marry  and 
reproduce  their  kind  with  sufficient  rapidity  to  keep  the  supply 
of  labor  intact.  It  would,  in  that  state  of  society,  be  necessary  to 
pay  such  wages  as  these  ;  but  it  could  hardly  be  said  that  every- 
thing which  these  well-to-do  laborers  consumed  could  be  classi- 
fied as  necessaries  of  life.  In  short,  wages  which  will  enable 
the  laborer  to  enjoy  comforts,  decencies,  and  luxuries,  as  well 
as  necessaries,  may  have  to  be  paid  in  order  to  keep  up  the 
supply  of  labor. 

Comforts.  Of  these  three  classes  of  goods,  comforts  are  the 
most  difficult  to  define.  While  not  absolutely  necessary  for 
the  maintenance  of  health  and  strength,  still  they  can  hardly 
be  dispensed  with  in  any  society  where  life  is  really  worth 
living.  A  young  and  vigorous  person  might,  by  running  to  and 
from  his  work  in  cold  weather,  dispense  with  an  overcoat. 
From  his  point  of  view  an  overcoat  could  hardly  be  called  a 
necessary,  and  yet  it  would  be  a  great  comfort.  Cushions  or 
upholstered  furniture,  spring  mattresses,  etc.  can  hardly  be 
called  absolute  necessaries,  and  yet  they  would  be  considered 
almost  indispensable  by  the  average  family. 

Decencies.  The  dividing  line  between  comforts  and  decencies 
is  likewise  obscure.  By  decencies  we  mean  those  articles  of 
consumption  which  the  habits  or  customs  of  one's  neighbor- 
hood or  one's  class  prescribe,  and  without  which  the  individual 
or  the  family  would  feel  that  it  could  scarcely  maintain  its 
position  of  respectability.  In  a  community  where  military  tradi- 
tions are  strong  and  society  tends  to  be  stratified,  a  military 
officer  could  almost  lose  caste  if  he  condescended  to  ride  on 
a  street  car.  In  such  a  community  a  private  carriage  would 
seem  almost  to  be  a  necessary,  though  according  to  our  defini- 
tion we  should  call  it  a  decency.  Anything  which  an  indi- 
vidual member  of  any  class,  occupation,  or  profession  would 
feel  ashamed  to  be  without  would  come  under  our  definition. 


474          PRINCIPLES  OF  POLITICAL  ECONOMY 

Adam  Smith1  included  both  decencies  and  comforts  under  nec- 
essaries and  gives  a  very  clear  description  of  the  difference,  as 
it  appeared  to  him  in  his  day,  between  necessaries  and  luxuries. 

By  necessaries  I  understand,  not  only  the  commodities  which  are  indis- 
pensably necessary  for  the  support  of  life,  but  whatever  the  custom  of  the 
country  renders  it  indecent  for  creditable  people,  even  of  the  lowest  order, 
to  be  without.  A  linen  shirt,  for  example,  is,  strictly  speaking,  not  a  neces- 
sary of  life.  The  Greeks  and  Romans  lived,  I  suppose,  very  comfortably, 
though  they  had  no  linen.  But  in  the  present  times,  through  the  greater 
part  of  Europe,  a  creditable  day-labourer  would  be  ashamed  to  appear  in 
public  without  a  linen  shirt,  the  want  of  which  would  be  supposed  to  denote 
that  disgraceful  degree  of  poverty  which,  it  is  presumed,  nobody  can  well 
fall  into  without  extreme  bad  conduct.  Custom,  in  the  same  manner,  has 
rendered  leather  shoes  a  necessary  of  life  in  England.  The  poorest  credit- 
able person  of  either  sex  would  be  ashamed  to  appear  in  public  without 
them.  In  Scotland,  custom  has  rendered  them  a  necessary  of  life  to  the 
lowest  order  of  men,  but  not  to  the  same  order  of  women,  who  may,  with- 
out any  discredit,  walk  about  bare-footed.  Under  necessaries,  therefore,  I 
comprehend,  not  only  those  things  which  nature,  but  those  things  which  the 
established  rules  of  decency  have  rendered  necessary  to  the  lowest  rank  of 
people.  All  other  things  I  call  luxuries,  without  meaning  by  this  appellation 
to  throw  the  smallest  degree  of  reproach  upon  the  temperate  use  of  them. 
Beer  and  ale,  for  example,  in  Great  Britain,  and  wine,  even  in  the  wine 
countries,  I  call  luxuries.  A  man  of  any  rank  may,  without  any  reproach, 
abstain  totally  from  tasting  such  liquors.  Nature  does  not  render  them 
necessary  for  the  support  of  life ;  and  custom  nowhere  renders  it  indecent 
to  live  without  them. 

Marshall2  divides  consumers'  goods  into  necessaries,  comforts, 
and  luxuries,  making  no  special  class  to  be  called  decencies. 

This  brings  us  to  consider  the  term  necessaries.  It  is  common  to  divide 
wealth  into  necessaries,  comforts,  and  luxuries;  the  first  class  including  all 
things  required  to  meet  wants  which  must  be  satisfied,  while  the  latter  con- 
sist of  things  that  meet  wants  of  a  less  urgent  character.  But  here  again 
there  is  a  troublesome  ambiguity.  When  we  say  that  a  want  must  be  satis- 
fied, what  are  the  consequences  which  we  have  in  view  if  it  is  not  satisfied? 

1  The  Wealth  of  Nations,  pp.  466-467.  The  Clarendon  Press,  Oxford,  1880. 

2  Alfred  Marshall,  Principles  of  Economics,  pp.  67-69.   Macmillan  and  Co., 
London,  5th  ed.,  1907. 


LUXURY  475 

Do  they  include  death  ?  Or  do  they  extend  only  to  the  loss  of  strength  and 
vigour  ?  In  other  words,  are  necessaries  the  things  which  are  necessary  for 
life  or  those  which  are  necessary  for  efficiency  ?  .  .  . 

It  may  be  true  that  the  wages  of  any  industrial  class  might  have  sufficed 
to  maintain  a  higher  efficiency,  if  they  had  been  spent  with  perfect  wisdom. 
But  every  estimate  of  necessaries  must  be  relative  to  a  given  place  and 
time ;  and  unless  there  be  a  special  interpretation  clause  to  the  contrary, 
it  may  be  assumed  that  the  wages  will  be  spent  with  just  that  amount  of 
wisdom,  forethought,  and  unselfishness  which  prevails  in  fact  among  the 
industrial  class  under  discussion.  With  this  understanding  we  may  say  that 
the  income  of  any  class  in  the  ranks  of  industry  is  below  its  necessary  level, 
when  any  increase  in  their  income  would  in  the  course  of  time  produce  a 
more  than  proportionate  increase  in  their  efficiency.  Consumption  may  be 
economized  by  a  change  of  habits,  but  any  stinting  of  necessaries  is  wasteful. 

Luxuries.  Where  comforts  or  even  luxuries  have  entered 
into  the  laborer's  standard  of  living,  it  would  undoubtedly  be 
true,  as  Marshall  suggests,  that  any  forcible  reduction  of  wages 
would  result  in  less  efficiency  on  the  part  of  the  laborers. 
From  the  standpoint  of  either  the  lawmaker  or  the  employer, 
therefore,  all  those  things  which  the  customs  of  the  time  and 
country  give  to  the  laborer  must  be  considered  as  necessaries. 
To  cut  down  a  portion  of  the  laborer's  wages  would  not  result 
in  the  mere  cutting  out  of  a  few  luxuries  from  his  consump- 
tion. He  would  be  quite  as  likely  to  cut  down  his  consumption 
of  physical  necessaries  as  of  those  things  which,  from  an  abso- 
lute point  of  view,  could  be  called  decencies  or  luxuries.  It 
is  a  well-known  fact  that  high-spirited  people,  with  social 
standards  and  traditions  to  maintain,  will,  if  they  find  them- 
selves in  reduced  circumstances,  deprive  themselves  of  absolute 
physical  necessaries  of  life  in  order  to  keep  up  appearances. 
This,  of  course,  is  certain  to  reduce  their  efficiency. 

While  this  is  a  final  consideration  so  far  as  the  employer  or 
the  lawmaker  is  concerned,  it  does  not  alter  the  fact  that  if 
these  people  could  be  appealed  to  on  moral  or  other  grounds 
to  rationalize  their  habits  of  consumption,  they  would  be  much 
better  off.  If  they  would  reduce  their  consumption  of  luxuries 


476          PRINCIPLES  OF  POLITICAL  ECONOMY 

and  increase  their  consumption  of  the  necessaries  of  life,  not 
only  their  working  efficiency  but  their  general  economic  well- 
being  would  be  improved.  "  Wherefore  will  ye  spend  your 
money  for  that  which  is  not  bread  "  ?  demanded  the  prophet. 
He  was  making  his  appeal,  however,  directly  to  the  individual 
and  not  proposing  any  control  of  consumption  by  law. 

Luxuries  have  very  much  the  same  meaning  to-day  as  that 
which  Adam  Smith  gave  to  them.  They  are  articles  of  con- 
sumption which  are  not  demanded  either  by  the  physical  health 
and  strength  of  the  people  or  by  the  rules  of  society,  but  are 
wholly  matters  of  individual  indulgence.  The  dividing  line, 
however,  between  decencies  and  luxuries  is  still  very  obscure. 
If  a  person  belongs  to  a  small  group  of  spendthrifts,  it  may 
be  claimed  that  the  rules  of  his  social  group  compel  him  to 
spend  money  lavishly  on  things  which  others  would  regard 
as  pure  luxuries.  He  may  therefore  claim  that  these  are  only 
decencies,  because  they  are  prescribed  by  the  rules  of  his 
group  or  class.  Instead  of  accepting  the  verdict  of  any  special 
class  or  set,  it  would  seem  better  to  confine  our  idea  of 
decencies  to  those  things  which  are  prescribed  by  the  almost 
universal  consensus  of  opinion  of  the  time  and  place.  Thus, 
in  America,  for  example,  it  would  be  almost  universally 
thought  to  be  indecent  for  men  and  women  to  appear  in 
public  places,  even  in  warm  weather,  without  shoes,  though 
there  are  certain  isolated  communities  where  this  rule  would 
not  prevail.  Before  the  advent  of  the  waist  shirt  it  was  gen- 
erally regarded  as  improper  for  a  man  to  appear  at  any 
public  place,  especially  indoors,  without  a  coat.  That  every 
woman  shall  possess  certain  articles  of  finery  is  a  rule  even 
among  the  poorest  of  people.  It  will  be  better,  therefore,  if 
we  restrict  the  definition  of  decencies  to  those  things  which 
society  in  general,  rather  than  some  special  clique  or  coterie, 
prescribes  as  necessary. 

Stimulating  effect  of  luxury.  Economists  have  been  some- 
what divided  on  the  question  as  to  whether  a  luxury  is  always 


LUXURY  477 

to  be  condemned  or  not.  McCulloch1  states  that  any  grati- 
fication, however  trivial,  is  necessary  if  an  individual  is  stimu- 
lated to  work  in  order  to  attain  it.  John  Stuart  Mill2  says, 
"  To  civilize  a  savage,  he  must  be  inspired  with  new  wants 
and  desires,  even  if  not  of  a  very  elevated  kind,  provided 
that  their  gratification  can  be  a  motive  to  steady  and  regu- 
lar bodily  and  mental  exertion."  It  is  a  well-known  fact  that 
in  certain  low  states  of  civilization  the  laborer  or  the  peon 
is  content  with  so  few  articles  of  consumption  that  he  will 
not  work  efficiently  or  steadily.  If,  by  working  three  days 
in  a  week,  he  can  earn  wages  enough  to  support  him,  in 
the  style  to  which  he  is  accustomed,  for  seven  days,  he  will 
work  only  three  days  in  the  week.  It  has  been  generally 
recognized  that  the  only  cure  for  this  difficulty  is  to  raise 
his  standard  of  living  and  increase  his  wants,  so  that  he 
will  have  a  motive  for  regular  and  steady  work.  Many  inter- 
esting stories  are  told  of  the  devices  by  means  of  which  the 
laborer  is  induced  to  work  or  by  which  his  wife  is  induced 
to  demand  more  wages  of  him  in  order  that  she  may  provide 
herself  with  finery. 

We  need  not  go  to  backward  countries,  however,  to  find 
examples  which  illustrate  precisely  the  same  principle.  There 
are  men  among  us  who  reduce  the  number  of  working  hours 
per  day  for  much  the  same  reason.  Finding  that  they  can  earn 
enough  in  four  hours  to  support  them  for  twenty-four,  they 
choose  to  work  only  four  hours  a  day ;  that  is,  they  go  to  their 
offices  at  about  ten  o'clock  in  the  morning  and  stay  until  about 
two,  and  spend  the  rest  of  the  day  at  the  club  or  the  golf  course. 
There  are  still  others  who  find  that  they  can  earn  enough  in 
twenty  years  to  support  them  for  the  whole  of  their  lives. 
They  therefore  retire  from  business  long  before  their  physical 
and  mental  capacity  has  begun  to  decline,  and  spend  the  rest 
of  their  time  in  pleasant  pursuits. 

1  J.  R.  McCulloch,  The  Principles  of  Political  Economy.   Edinburgh,  1825. 

2  Principles  of  Political  Economy,  Bk.  I,  Chapter  VII,  §  3. 


478          PRINCIPLES  OF  POLITICAL  ECONOMY 

Economically  speaking,  however,  all  these  men,  from  the 
peon  up,  are  merely  choosing  between  different  kinds  of  luxury. 
To  the  peon,  leisure,  sport,  amusement,  and  even  rest  are  lux- 
uries in  which  he  delights.  If  his  desire  for  this  sort  of  luxury 
is  stronger  than  his  desire  for  other  kinds,  he  will  choose  this 
kind.  The  same  is  true  of  the  man  who  cuts  down  his  work- 
ing day  or  his  working  years.  To  him,  leisure,  sport,  and 
rest  are  luxuries.  If  he  cares  more  for  these  than  for  such 
additional  luxuries  of  other  kinds  as  he  could  secure  by  working 
longer,  he  will  of  course  choose  these. 

Material  and  immaterial  luxuries.  It  is  true  that  by  choos- 
ing material  luxuries  rather  than  the  immaterial  satisfaction 
of  leisure  and  rest  the  quantity  of  material  goods  which  are 
produced  and  put  on  the  market  is  increased.  The  statistics 
of  wealth  are  expanded.  The  census  taker  and  the  tax  assessor 
find  more  tangible  articles  of  wealth  in  such  a  community  than 
they  would  find  in  the  community  which  preferred  to  take  its 
luxuries  in  the  form  of  leisure.  Doubtless  all  of  us  who  are 
members  of  a  strenuous  race,  to  whom  leisure  does  not  seem 
so  very  desirable,  and  also  of  a  race  which  might  be  malignly 
characterized  as  a  greedy  or  a  gluttonous  race,  having  powerful 
desires  for  material  luxuries,  think  that  we  have  made  much 
the  better  choice.  We  are  therefore  much  inclined  to  despise 
the  race  which  chooses  otherwise.  There  is  such  a  thing  as 
a  pot  calling  a  kettle  black. 

A  storehouse  of  labor.  There  is  another  argument,  however, 
which  goes  back  at  least  as  far  as  David  Hume,  to  the  effect 
that  luxuries  must  be  regarded  as  a  storehouse  of  labor  which 
in  the  exigencies  of  the  state  may  be  turned  to  the  public 
service.  This  may  mean  merely  that  a  community  which  is 
expending  a  large  proportion  of  its  energy  in  the  production  of 
luxuries  may,  in  times  of  great  crisis,  turn  that  surplus  energy 
into  the  work  of  meeting  the  crisis.  In  time  of  war,  for  in- 
stance, the  consumption  of  luxuries  may  be  cut  down,  and  the 
productive  energy,  which  had  been  used  in  the  production  of 


LUXURY  479 

luxuries,  may  now  be  used  in  the  prosecution  of  the  war  or 
in  the  manufacture  of  munitions  and  war  equipment.  This  is 
undoubtedly  a  sound  argument  so  far  as  it  goes. 

In  order  to  put  several  million  men  of  working  age  into  the 
army  and  navy,  and  more  millions  into  the  munition  factories 
and  navy  yards,  and  others  into  the  mines  to  produce  the  raw 
materials^  and  still  others  onto  the  farms  in  order  to  increase 
the  food  production,  it  is  absolutely  certain  that  labor  must  be 
withdrawn  from  some  other  industries.  It  is  fairly  obvious  that 
there  are  only  two  sources  from  which  they  can  be  drawn. 
They  who  are  not  working  may  be  put  to  work,  and  those  who 
are  doing  unnecessary  kinds  of  work  may  be  put  into  the 
necessary  industries.  There  is  no  other  possibility.  The  nation 
must  therefore  look  about  and  see  what  can  be  done  in  these 
two  directions. 

Most  of  our  men  of  working  age  are  now  at  work  doing 
something  which  is  necessary,  convenient,  or  pleasing.  A  good 
many  women  are  virtually  idle,  though  they  all  probably  man- 
age to  keep  busy  at  something  or  other.  Some  of  them  may 
work  in  munition  factories  or  take  places  in  the  ordinary  fac- 
tories, shops,  and  stores,  displacing  men  and  women  already 
employed.  Those  who  are  displaced  may  then  enlist  or  go  into 
munition  factories.  A  much  better  opportunity  is  offered  in 
their  own  homes.  Every  woman  who  keeps  one  or  more  serv- 
ants, and  who  is  able  to  do  anything  either  inside  or  outside 
the  home,  may  do  her  own  housework  and  discharge  her  serv- 
ants. They  will  then  be  available  for  the  industries  whose 
expansion  is  made  necessary  by  the  war.  Those  who  are 
situated  where  they  can  have  a  sizable  garden  may  work  ad- 
vantageously at  gardening,  but  they  should  take  it  seriously 
and  not  waste  their  time  on  a  few  struggling  garden  plants. 
They  should  do  an  appreciable  fraction  of  what  is  known  as 
a  man's  work. 

Reducing  consumption  in  times  of  national  crisis.  A  much 
greater  opportunity  lies  in  the  closing  or  cutting  down  of  all 


480          PRINCIPLES  OF  POLITICAL  ECONOMY 

unnecessary  industries  and  occupations.  If  every  luxury- 
producing  industry  were  closed  down,  a  vast  quantity  of  labor 
would  be  released.  It  would  then  be  available  either  for  mili- 
tary purposes  or  for  the  production  of  the  necessaries  of  life. 
Our  golf  courses,  baseball  fields,  and  tennis  courts  could  be 
transformed  into  farms  and  gardens.  This  would  add  a  good 
many  acres  to  the  productive  land,  and,  what  is  vastly  more 
important,  the  players  as  well  as  the  spectators  could  be  used  in 
productive  work.  These  suggestions  are  enough  to  indicate  that 
considerable  changes  in  the  daily  habits  of  the  people  may  be 
necessary  if  a  great  national  crisis  is  to  be  met. 

These  changes  in  habits  may  profitably  go  much  farther. 
The  people  may  economize  greatly  in  their  consumption.  It 
is  amusing  to  hear  some  people  talk  about  the  waste  in  Ameri- 
can life.  You  would  think  that  the  great  American  garbage 
pail  was  a  veritable  gold  mine  if  it  could  only  be  profitably 
worked.  Doubtless  there  is  some  waste  there,  and  it  will  bear 
looking  into ;  but  if  we  would  consume  more  food  and  fewer 
.condiments,  relishes,  and  delicacies,  whose  real  function  is  to 
make  the  food  palatable,  we  should  reduce  the  cost  of  food 
about  one  half.  Starch,  in  the  form  of  grain,  potatoes,  or 
coarse  vegetables,  is  our  principal  food.  To  this  must  be  added 
a  very  moderate  amount  of  protein,  fats,  and  sugar.  These, 
however,  may  also  be  made  to  serve  the  purpose  of  making  the 
basic  starchy  food  more  palatable.  Fruits  and  the  finer  vegetables 
and  salads  should  be  made  to  serve  mainly  as  relishes.  Instead, 
many  of  us  make  our  meals  principally  of  things  which  should 
serve  as  condiments,  relishes,  and  delicacies,  using  starchy  food 
only  as  a  means  of  diluting  them.  It  is  this  habit,  rather  than 
our  garbage  pails,  with  which  the  French  people,  who  are  so 
much  wiser  in  matters  of  food  than  we  are,  find  most  fault.  As 
to  clothing,  if  the  people  patch  and  darn  it  and  make  it  last 
longer,  the  textile  and  clothing  trades  will  then  have  time  to 
produce  army  supplies.  Without  such  changes  of  habits  as 
these,  let  it  be  remembered,  it  will  be  impossible  to  recruit 


LUXURY  481 

an  army  and  navy  and  at  the  same  time  increase  the  produc- 
tion of  supplies  for  the  army  and  navy  as  well  as  of  all  the 
basic  necessaries  of  life. 

There  are,  however,  two  ways  in  which  these  changes  may 
be  forced  upon  the  people,  whether  they  will  or  no.  If  they 
insist  on  consuming  wastefully  and  spending  their  money  for 
things  which  are  not  necessary,  while  men  are  being  at  the 
same  time  taken  out  of  productive  industry,  this  unbalancing 
of  supply  and  demand  will  send  prices  so  high  that  most  of  the 
people,  particularly  the  poor  people,  will  not  be  able  to  buy 
anything  but  the  barest  necessaries.  The  well-to-do  owe  it  as 
a  duty,  therefore,  to  reduce  their  consumption  and  thereby  re- 
duce the  demand  upon  the  undermanned  industries.  Again, 
if  the  government  is  wise  enough,  it  will  put  such  high  taxes 
upon  all  incomes  as  to  compel  the  people  to  reduce  their  con- 
sumption and  their  purchases.  In  this  case,  instead  of  buying 
supplies  and  hiring  men  with  their  money,  the  people  will  turn 
it  over  to  the  government,  which  will  then  buy  supplies  and 
hire  men  with  it.  If  the  taxes  are  high  enough,  women  will 
be  compelled  to  do  their  own  housework  and  discharge  their 
servants,  men  will  be  compelled  to  close  their  golf  courses  and 
stop  going  to  ball  games,  and  everybody  will  be  compelled 
to  buy  cheaper  and  more  nutritious  food  and  to  wear  their 
old  clothes  longer.  But  they  ought  to  do  all  these  things  and 
a  multitude  of  others  anyway,  in  a  time  when  the  strength  of 
the  nation  is  being  put  to  the  test  and  its  very  life  is  at  stake. 

The  slogan  "business  as  usual"  in  time  of  a  great  war  is 
the  result  of  crass  ignorance  of  some  of  the  basic  facts  of  eco- 
nomic life.  It  is  sometimes  asserted  in  support  of  that  slogan 
that  the  only  reason  why  the  people  are  well-to-do  is  that  they 
have  been  spending  their  money  for  the  products  of  industry. 
Therefore,  if  the  people  quit  spending  their  money,  production 
will  be  cut  off  and  prosperity  destroyed.  But  a  little  intelligent 
analysis  will  show  that  it  is  not  proposed  to  spend  any  less 
money  in  time  of  war,  or  to  hire  any  less  labor,  than  in  time 


482          PRINCIPLES  OF  POLITICAL  ECONOMY 

of  peace.  The  obvious  thing  is  that  the  energy  of  the  people 
must  be  completely  redirected.  The  great  purpose  of  most 
people  in  time  of  peace  is  to  gratify  their  desires.  In  time  of 
war  the  great  purpose  must  be  to  win  the  war.  The  energies 
which  have  been  devoted  to  the  work  of  producing  objects  of 
gratification  must  now  be  turned  to  the  work  of  beating  the 
enemy.  If  everyone  insisted  on  having  as  many  objects  of  desire 
and  gratification  in  time  of  war  as  in  time  of  peace,  it  would 
take  just  as  many  men  to  produce  these  objects  of  desire  and 
gratification,  and  there  would  be  none  to  spare  for  defending 
the  country.  Instead  of  spending  their  money  directly  for  their 
own  private  purposes,  the  obvious  duty  of  the  people  is  to  turn 
over  as  much  of  it  as  they  can  possibly  spare,  and  let  the 
government  spend  it  in  purchasing  war  supplies  and  in  paying 
men  to  do  the  few  things  which  are  supremely  needful  for  the 
national  defense. 

Rapid  recovery  after  a  local  disaster.  Even  in  cases  of 
great  local  disaster,  such  as  a  great  fire  or  earthquake,  it  has 
been  remarked  many  times  that  recovery  comes  with  amazing 
rapidity.  In  spite  of  the  fact  that  vast  quantities  of  wealth 
are  destroyed,  the  city  soon  recovers  and  becomes  apparently 
as  prosperous  as  ever.  Luxury  is  supposed  by  some  to  have 
an  important  bearing  on  this  question.  The  energy  which, 
before  the  disaster,  was  spent  in  producing  luxuries  is  now 
available  to  be  spent  in  rebuilding  what  was  destroyed.  In  order 
to  do  this,  however,  the  people  must,  for  a  time  at  any  rate, 
reduce  their  consumption  of  luxuries.  The  individual  whose 
property  has  been  destroyed  is  to  that  extent  poorer  than  he 
was  before.  He  may  borrow  capital  with  which  to  rebuild,  but 
until  the  debt  is  paid  off,  his  effective  income  is  considerably 
reduced.  He  therefore  has  less  money  to  spend  on  articles  of 
luxury ;  he  is  virtually  spending  that  money  on  a  new  building. 

The  objection  may  be  raised  that  the  luxury  which  takes 
the  form  of  leisure  would  also  furnish  a  fund  of  energy  for 
the  meeting  of  a  great  national  crisis  or  repairing  a  local 


LUXURY  483 

disaster.  Men  who  have  remained  idle,  enjoying  leisure,  may 
now  go  to  work  to  carry  on  the  war  or  to  rebuild  the  city 
which  has  been  partially  destroyed.  This  objection  is  some- 
what weak,  however,  because,  in  the  first  place,  habits  of  sloth 
and  idleness  are  much  more  difficult  to  overcome  than  habits 
of  lavish  consumption.  The  sheer  inertia  of  the  people  makes 
it  almost  impossible  to  rouse  them  to  extra  exertions  in  time 
of  crisis,  whereas  the  people  who  have  been ,  exerting  them- 
selves strenuously  in  the  production  of  articles  of  luxury  may, 
with  less  difficulty,  redirect  their  strenuous  energy.  In  a  sense 
the  productive  machinery  of  the  community  is  already  going. 
It  can  be  kept  going  and  its  direction  changed  more  easily 
than  it  can  be  started  up. 

In  the  second  place,  when  a  community  takes  its  luxury  in 
the  form  of  idleness,  it  is  certain  to  be  ill  equipped  with  the 
machinery  of  production  as  well  as  with  the  technical  knowl- 
edge and  skill  which  are  necessary  to  efficient  production. 
If  they  lack  machinery  and  technical  knowledge  and  skill, 
they  will  not  be  able  to  carry  on  a  modern  war  successfully 
or  to  repair  a  local  disaster;  whereas  a  community  that  takes 
its  luxury  in  the  form  of  material  goods  will  have  learned  in 
the  process  of  production  much  technical  skill,  and  will  have 
accumulated  vast  funds  of  machinery  and  tools.  If  there  is 
anything  that  modern  warfare  has  taught,  it  is  the  superiority 
in  war  of  the  nation  that  is  thus  equipped.  The  technical 
skill  and  the  machinery  which  are  accumulated  for  purposes 
of  production  may  easily  be  turned  to  the  purposes  of  destruc- 
tion, and  in  war  the  community  that  is  best  equipped  for  the 
work  of  destruction  will  win. 

Reducing  the  rate  of  permanent  construction.  So  far  the 
argument  seems  conclusive  in  favor  of  material  luxury  as 
against  immaterial  luxury  in  the  form  of  leisure  and  idleness. 
We  are  far,  however,  from  a  complete  justification  of  luxury 
in  the  ordinary  sense.  The  community  that  is  in  the  habit  of 
investing  its  money  for  the  future  rather  than  of  buying  objects 


484          PRINCIPLES  OF  POLITICAL  ECONOMY 

of  immediate  gratification  will  likewise  have  a  fund  of  surplus 
energy  at  its  disposal.  All  the  energy  which  has  been  devoted 
to  permanent  construction  for  the  future  good  of  society  may, 
in  time  of  great  national  crisis  or  local  disaster,  be  redirected 
toward  meeting  the  crisis  or  repairing  the  local  damage.  The 
kind  of  skill  which  is  necessary  to  permanent  construction  is 
of  quite  as  high  an  order  as  the  kind  which  is  necessary  to 
the  production  of  ephemeral  articles  of  consumption.  All  the 
advantages,  in  short,  which  a  luxurious  community  possesses 
for  the  meeting  of  a  great  crisis  are  also  possessed  by  the 
thrifty  community  which  spends  a  good  portion  of  its  income 
in  durable  construction  and  in  building  for  future  generations. 
In  the  long  run  the  community  that  spends  a  large  portion  of 
its  energy  in  permanent  construction  will  have  certain  advan- 
tages over  the  community  that  consumes  luxuriously.  If  every 
farmer,  for  example,  should  put  back  into  his  farm  a  part  of 
his  annual  income,  in  the  way  of  improvement  of  the  soil,  in 
ditching,  draining,  fencing,  and  building,  he  would  be  using 
up  surplus  energy  just  as  truly  as  he  would  be  if  he  spent  that 
amount  of  money  in  luxurious  consumption.  In  time  of  national 
crisis  he  can  suspend,  for  the  time,  further  building  and  im- 
provements on  his  farm  and  have  energy  to  spare  for  the 
production  of  more  food ;  or  he  can  dispense  with  a  certain 
amount  of  hired  help,  which  will  then  be  available  for  govern- 
ment purposes.  After  a  few  generations  the  nation  whose 
farmers  systematically  put  back  into  their  farms  a  part  of  their 
incomes  will  have  much  better  farms  and  much  greater  pro- 
ductive power  than  the  community  which  merely  keeps  its 
agricultural  wealth  intact  and  spends  the  surplus  in  luxurious 
consumption. 

That  which  applies  to  farms  applies  also  to  factories,  shops, 
and  all  other  productive  establishments.  The  community  which 
is  in  the  habit  of  adding  to  its  accumulated  wealth  in  each  gen- 
eration by  investing  a  part  of  its  income  in  tools  and  instruments 
for  future  production  will,  after  the  lapse  of  a  few  generations, 


LUXURY  48$ 

be  vastly  stronger  than  the  community  which  merely  keeps  its 
productive  power  intact  and  consumes  all  its  income.  Thus 
we  reach  the  conclusion  that,  although  the  luxurious  consumption 
of  material  articles  may  be  very  much  better  than  the  luxurious 
enjoyment  of  leisure,  nevertheless  thrift,  forethought,  and  the 
investment  of  incomes  in  instruments  for  future  production  is 
better  still.  He  who  does  less  well  than  he  can,  does  ill. 
Therefore  he  who  consumes  luxuriously  when  he  might  invest 
productively  is  doing  badly. 


CHAPTER  XLI 
THE  CONTROL  OF  CONSUMPTION 

Sumptuary  laws.  Luxurious  consumption  can  undoubtedly 
be  condemned  on  economic  grounds  as  being  less  desirable 
than  frugality,  forethought,  and  the  investment  of  funds  in 
productive  industries  and  objects  of  durable  satisfaction.  Never- 
theless it  does  not  follow  of  necessity  that  the  government 
should,  through  sumptuary  laws,  attempt  to  repress  luxury. 
To  prohibit  the  consumption  of  articles  of  luxury  might  very 
easily  take  away  the  motive  to  industry.  If  the  people  cannot 
have  expensive  commodities,  they  may  take  their  luxury  in  the 
form  of  leisure,  idleness,  and  self-amusement.  This,  as  we  saw 
in  the  last  chapter,  is  even  less  desirable  than  luxurious  con- 
sumption. If  we  grant  the  argument  used  by  Mill  and  others, 
to  the  effect  that  an  increase  of  wants  sometimes  has  the  effect 
of  overcoming  the  tendency  to  sloth  and  idleness,  it  would 
follow  that  if  the  government  should  make  it  impossible  for 
men  to  gratify  these  increased  wants,  it  would  merely  drive 
the  people  back  into  sloth  and  idleness.  This  could  only  be 
counteracted  by  other  laws  compelling  them  to  work,  which 
would  be  a  kind  of  slavery. 

Legislative  control  not  always  effective.  One  of  the  last 
things  that  we  learn  regarding  legislation  is  that  it  usually 
takes  a  large  number  of  new  legislative  acts  to.  correct  or 
counteract  the  unlooked-for  results  of  any  legislative  act. 

Another  objection  to  legislative  attempts  to  suppress  luxu- 
rious consumption  is  the  one  pointed  out  by  Adam  Smith  and 
others,  to  the  effect  that  when  their  habits  of  life  are  fixed,  men 
and  women  will  frequently  give  up  the  necessaries  of  life  be- 
fore they  will  give  up  luxuries.  This  applies  especially  to  the 

486 


THE  CONTROL  OF  CONSUMPTION  487 

attempts  to  make  luxuries  expensive  by  taxing  them.  When 
they  become  very  expensive,  some  people  will  insist  on  having 
them,  even  if  it  takes  their  whole  income  to  buy  them  and 
leaves  them  nothing  for  the  necessaries  of  life. 

These  arguments,  it  will  be  noticed,  are  based  upon  the  in- 
efficiency of  sumptuary  laws  rather  than  upon  any  more  funda- 
mental objection  to  them.  In  general  they  seem  to  produce 
results  which  are  worse  than  the  thing  they  try  to  cure.  Noth- 
ing whatever  can  be  said,  however,  against  a  voluntary  foregoing 
of  luxuries  and  a  rationalizing  of  standards  of  living  on  the 
part  of  the  people  themselves.  It  is  one  thing  for  the  people 
to  want  the  right  things ;  it  is  quite  a  different  thing  to  try  to 
force  them  to  consume  the  right  things  whether  they  want 
them  or  not.  It  is  one  thing  for  the  people  voluntarily  to  give 
up  luxuries ;  it  is  quite  a  different  thing  to  compel  them  by 
law  to  do  so,  whether  they  are  willing  or  not. 

Control  of  vice  is  M  sumptuary  legislation."  In  some 
extreme  cases,  however,  a  luxury  becomes  so  extremely  demor- 
alizing and  dangerous  to  society  as  to  justify  government  regu- 
lation or  suppression.  There  may  be  undesirable  results  of  such 
legislation,  —  there  are  pretty  sure  to  be  ;  but  if  these  undesir- 
able results  are  less  undesirable  than  the  thing  which  is  sup- 
pressed, there  is  a  net  gain.  Regulation  or  suppression  of  vice 
of  all  kinds  is  a  kind  of  sumptuary  legislation.  If  the  vicious 
habit  or  the  vicious  form  of  consumption  is  sufficiently  injurious, 
its  suppression  is  justifiable,  even  though  some  undesirable 
results  may  follow  its  suppression. 

There  are,  however,  a  good  many  sentimental  objections  to 
sumptuary  laws  which  have  no  connection  with  the  real  objec- 
tions. We  are  all  consumers,  and  if  the  government  begins 
regulating  consumption,  we  are  each  of  us  likely  to  come  in  for 
a  certain  amount  of  regulation.  We  are  rather  impatient  of  all 
kinds  of  regulation  when  it  is  applied  to  ourselves,  though  we 
may  be  very  patient  of  the  regulation  of  other  people,  as  we  are 
patient  in  the  contemplation  of  other  people's  troubles.  We 


488          PRINCIPLES  OF  POLITICAL  ECONOMY 

are  not  all  of  us  in  the  banking  or  the  railroad  business,  and 
do  not  feel  in  danger  when  the  government  undertakes  to 
regulate  those  and  other  special  lines  of  business. 

No  essential  difference  between  controlling  business  and  con- 
trolling consumption.  This  consideration  has  led  to  quasi- 
serious  attempts  to  draw  a  sharp  distinction  between  the  regu- 
lation or  control  of  business  and  the  regulation  or  control  of 
consumption.  But  all  such  distinctions  are  trivial.  Habits 
of  consumption,  as  stated  above,  are  quite  as  important  to  the 
welfare  of  the  nation  as  methods  ef  doing  business.  To  at- 
tempt to  regulate  or  control  either  is  certain  to  produce 
undesirable  results.  Nevertheless,  where  the  evils,  either  of 
unregulated  consumption  or  of  unregulated  business,  are  great 
enough,  we  must  have  regulation  and  take  our  chances  with 
the  evils  and  difficulties  of  regulation.  When  we  forget  our 
own  personal  interests  and  begin  to  think  in  terms  of  the  pros- 
perity, power,  and  greatness  of  the  nation,  all  our  sentimental 
objection  to  either  form  of  regulation  will  disappear,  and  we 
shall  begin  to  weigh  the  evils  of  lack  of  regulation  against  the 
evils  of  regulation.  Whenever  the  balance  turns  in  favor  of 
regulation,  we  shall  be  ready  for  it. 

The  national  rather  than  the  personal  point  of  view.  If 
one  will  look  around  and  see  what  is  going  on,  one  will  dis- 
cover that  the  people  who  think  in  terms  of  nationality  rather 
than  in  terms  of  self -gratification  are  just  as  prone  to  legislate 
on  matters  of  consumption  as  on  matters  of  business.  It  is 
only  those  who  think  in  terms  of  their  own  interest  who  are 
likely  to  make  any  distinction.  Again,  regulation,  control,  or 
suppression  of  the  consumption  of  alcohol  is  one  of  the  most 
widespread  and  democratic  movements  of  the  world  to-day. 
Very  few  of  those  who  favor  this  kind  of  legislation  —  gener- 
ally none  of  those  who  lead  in  the  movement  —  have  anything 
personal  to  gain  by  it.  Most  of  them  do  not  use  alcohol  and 
it  does  them  very  little  direct  harm.  The  suppression  of  liquor  is 
favored  in  this  country  mainly  by  those  who  have  been  here  long 


THE  CONTROL  OF  CONSUMPTION      489 

enough  to  develop  a  sense  of  nationality.  It  is  opposed  mainly 
by  those  who  have  not  been  here  long  enough  to  develop  an  in- 
terest in  the  future  prosperity,  power,  and  greatness  of  the  nation. 
Whenever  a  nation  is  facing  a  great  crisis  in  its  history, 
when  its  strength  and  endurance  are  being  put  to  a  severe  test, 
when,  in  short,  it  is  fighting  for  its  life  as  a  nation,  the  people 
are  forced  to  think  in  terms  of  national  life  rather  than  in 
terms  of  individual  life.  At  such  times  the  people  find  it  just 
as  necessary  that  the  government  shall  regulate  consumption  as 
that  it  shall  regulate  production.  They  also  find  that  freedom 
of  speech  is  not  more  sacred  or  inviolable  than  freedom  of  run- 
ning a  business.  Military  necessity  always  inaugurates  a  regime 
of  regulation  and  compulsion.  War  is  compulsory  business  from 
beginning  to  end.  When  a  nation  enters  upon  a  great  war,  it 
passes  instantly  from  the  realm  of  gold  to  the  realm  of  iron, 
—  from  a  realm  in  which  a  price  list  is  followed  and  voluntary 
agreement  is  the  general  rule  to  a  realm  in  which  authority  is 
obeyed  and  compulsion  is  the  general  rule.  Compulsion  is 
likely  to  apply  in  all  fields  of  activity,  not  simply  in  the  field 
of  production  and  business  management,  of  transportation  and 
food  distribution,  but  also  in  the  field  of  consumption  and  even 
in  the  field  of  selling  talk  for  a  profit. 

Selling  talk  for  a  price.  Those  who  make  their  living  by 
talking  and  writing  are  frequently  unable  to  see  any  reason 
why  their  business  should  be  regulated  by  the  government. 
These  are  the  people  who  are  likely  to  be  the  strongest  advo- 
cates of  "freedom  of  speech"  and  "freedom  of  the  press" 
and,  in  general,  of  a  laissez-faire  policy  with  respect  to  their 
own  business.  As  consumers  are  likely  to  object  to  the  regula- 
tion of  consumption,  and  business  men  to  the  regulation  of 
business,  so  the  talkers  and  writers  are  likely  to  object  to  the 
regulation  of  talking  and  writing.  Nevertheless,  those  who  think 
in  terms  of  the  national  interest  are  not  likely  to  be  influenced 
by  these  distinctions.  The  censorship  of  the  press,  the  control 
of  consumption,  and  the  regulation  of  business  may  all  be  equally 


490          PRINCIPLES  OF  POLITICAL  ECONOMY 

justifiable  at  such  a  time.  Instead  of  trying  to  find  reasons 
why  their  own  business  should  receive  such  consideration  from 
the  government,  it  would  be  a  profitable  exercise  for  all  of  us 
to  ponder  a  little  more  upon  a  certain  text  regarding  those  who 
are  more  anxious  to  extract  motes  from  their  brothers'  eyes 
than  beams  from  their  own. 

Vice  as  a  selective  agent.  One  of  the  strongest  arguments 
against  the  public  regulation  of  vice  or  injurious  forms  of  con- 
sumption is  that  vice  acts  as  a  fool-killer  and  helps  to  rid  the 
world  of  those  undesirable  persons  who  are  unable  to  withstand 
temptation.  There  is  some  merit  in  this  argument,  and  if  the 
fool-killer  worked  with  more  accuracy  than  it  seems  to  do,  so 
that  no  one  but  the  guilty  individual  ever  suffered  from  his 
guilt,  the  argument  in  its  favor  would  be  very  strong.  Unfortu- 
nately there  are  not  many  cases  in  which  the  vicious  individual 
injures  no  one  but  himself.  He  is  quite  as  likely  to  injure 
others  as  to  injure  himself.  If  it  were  true  that  the  individual 
who  succumbs  to  vice  never  injured  anybody  else  but  himself, 
it  might  be  argued  with  a  good  deal  of  reason  that  the  best 
way  to  get  rid  of  him  would  be  to  allow  him  to  destroy  him- 
self as  rapidly  as  possible,  —  that  by  so  doing  we  should  in  the 
course  of  time  build  up  a  strong  race  of  people,  who  could  live 
in  the  presence  of  temptation  without  injury.  In  a  certain 
primitive  state  of  society,  where  there  was  little  interdepend- 
ence of  parts,  all  this  might  be  true.  In  a  highly  complex 
society,  such  as  that  with  which  we  are  acquainted,  it  is  not 
true.  The  individual  who  succumbs  to  vice  is  a  menace  to  the 
whole  community.  The  danger  is  not  confined  to  the  innocent 
members  of  his  own  family,  who  of  course  are  frequently  re- 
duced to  want  and  humiliation  through  no  fault  of  their  own. 

We  must  keep  certain  large  and  tangible  facts  always  before 
us  when  we  are  considering  questions  of  this  kind.  The  chauf- 
feur who  destroys  his  dependableness  through  his  own  vice 
may  occasionally  injure  himself,  but  he  is  rather  more  likely 
to  injure  other  people.  The  locomotive  engineer  who  becomes 


THE  CONTROL  OF  CONSUMPTION  491 

incapacitated  through  any  kind  of  vice  or  bad  habit  may  occa- 
sionally destroy  himself,  but  he  usually  destroys  a  number  of 
others  in  the  process.  The  motorman,  the  train  dispatcher, 
the  surgeon,  the  drug  clerk,  and  a  multitude  of  others  who  are 
in  responsible  positions  imperil  others  quite  as  much  as  them- 
selves if  they  ever  become  irresponsible  and  undependable 
through  drunkenness  or  any  other  vice. 

Any  vice  which  acts  so  swiftly  and  so  injuriously  must  seri- 
ously endanger  the  rest  of  society  and  must  obviously  call  for 
public  regulation.  This  applies  not  simply  to  the  extremely 
injurious  forms  of  consumption  known  as  vice,  but  to  any  kind 
of  injurious  or  irrational  consumption,  such  as  luxury.  In  a 
time  of  national  crisis,  when  every  ounce  of  productive  energy 
is  needed  to  meet  the  situation,  he  who  consumes  luxuriously 
is  causing  the  waste  of  productive  energy  and  is  thus  interfer- 
ing with  the  success  of  the  nation.  In  time  of  war,  when 
armies  and  navies  must  be  raised,  ships  and  munitions  manu- 
factured on  a  vast  scale,  and  food  and  clothing  produced  more 
abundantly  than  ever,  the  question  is  always  one  of  economizing 
productive  power.  To  use  up  any  of  this  productive  power 
needlessly  in  the  production  of  luxuries  is  to  take  it  out  of  the 
nation's  industries  and  even  to  threaten  national  disaster.  In 
such  times  the  injury  which  follows  from  luxurious  consump- 
tion is  so  desperate  as  to  justify  public  regulation.  Even 
though  some  injurious  results  may  follow  from  this  regulation, 
these  can  scarcely  be  any  greater  than  those  which  follow  the 
unregulated  consumption  of  luxuries. 

In  normal  times  the  danger  from  luxurious  consumption  is 
not  so  acute,  and  the  need  for  regulation  is  therefore  not  so 
great.  In  this  case  we  may  have  to  consider  whether  luxuri- 
ous consumption  is  more  injurious  than  the  efforts  to  regulate 
it.  This  consideration,  however,  applies  to  all  other  forms  of 
regulation  and  control.  There  is  involved  here  a  question  of 
balance  of  profit  and  loss.  It  is  highly  important  that  on 
all  questions  of  regulation  we  balance  the  accounts  carefully. 


492          PRINCIPLES  OF  POLITICAL  ECONOMY 

There  is  some  cost  in  the  mere  extension  of  government  con- 
trol and  multiplication  of  government  offices.  This  diverts 
men  from  productive  industry  into  government  jobs.  Unless 
they  can  save  more  to  the  country  through  their  efforts  as 
government  officials  than  they  could  produce  if  they  were  left 
in  productive  industry,  the  loss  is  greater  than  the  profit. 
Again,  if  through  too  much  regulation  legitimate  industries 
are  discouraged  to  a  degree  that  more  than  offsets  any  saving 
which  comes  from  regulation,  there  is  always  a  net  loss.  In  the 
case  of  mild  luxuries  which  work  no  very  serious  injury  to 
anybody,  the  general  rule  has  been  not  to  waste  any  energy 
by  multiplying  government  offices  in  order  to  suppress  them. 
But  in  times  of  national  crisis  the  policy  with  respect  even  to 
mild  luxuries  may  have  to  be  changed.  In  normal  times  as 
well  as  in  times  of  crisis  the  injury  from  certain  extreme  forms 
of  luxury  may  be  so  great  as  to  justify  permanent  control, 
regulation,  or  suppression. 

Luxurious  consumption  does  not  increase  the  demand  for 
labor.  There  can  be  no  doubt,  however,  that  luxurious  con- 
sumption is  in  itself  an  injury  to  the  public,  and  particularly 
to  the  laboring  classes,  however  inexpedient  it  might  be  for 
the  government  to  use  its  power  of  compulsion  to  prohibit 
luxury.  There  is  an  ancient  and  nauseous  fallacy  to  the  effect 
that  the  extravagance  of  the  rich  gives  employment  to  the 
poor.  Nothing  could  be  any  farther  from  the  truth.  The 
extravagance  of  the*  rich  gives  much  less  employment  to  the 
poor  than  the  accumulation  and  investment  by  the  rich  in 
various  kinds  of  productive  industry.  The  individual  who  buys 
extravagantly  does  of  course  set  labor  to  work  producing 
the  objects  of  extravagance,  but  the  individual  who  invests 
largely  also  sets  labor  to  work  producing  the  buildings,  tools, 
etc.  in  which  he  invests.  In  addition  to  this  he  adds  definitely 
to  the  productive  power  of  the  community.  Furthermore,  labor 
must  be  hired  to  make  use  of  the  buildings  and  the  tools,  and 
there  is  a  larger  social  product  out  of  which  to  pay  their  wages. 


THE  CONTROL  OF  CONSUMPTION      493 

Comparatively  speaking,  therefore,  the  extravagance  of  the 
rich  takes  away  from  the  employment  of  the  poor.  From  that 
point  of  view  extravagant  consumption  is  a  social  injury. 

Leisure  versus  luxury.  If,  as  suggested  above,  there  were 
no  ulterior  results  from  the  suppression  of  extravagance,  the 
state  would  be  fully  justified  in  suppressing  it ;  but  if  the  sup- 
pression of  extravagance  merely  produced  leisure  and  idleness, 
instead  of  extravagance,  more  harm  than  good  would  be  done. 
We  must  conclude,  therefore,  that  where  a  form  of  consumption 
has  become  so  definitely  vicious  and  injurious  to  the  rest  of  soci- 
ety as  to  produce  more  harm  than  would  probably  be  produced 
by  compulsory  suppression,  then  suppression  must  be  justified. 
But  where,  even  though  it  be  harmful,  it  is  not  more  harmful 
than  other  results  which  would  probably  follow  from  its  sup- 
pression, then  suppression  is  not  justifiable.  It  must  be 
remembered,  however,  that  laws  suppressing  vice  are  in  a 
sense  sumptuary  laws.  The  only  difference  between  these  and 
other  sumptuary  laws  lies  in  the  fact  that  the  forms  of  con- 
sumption which  they  attempt  to  regulate  or  suppress  meet 
with  such  general  disapproval  as  to  make  their  suppression 
popular,  whereas  in  other  cases  the  forms  of  consumption  are 
not  universally  condemned  and  therefore  their  suppression  is 
not  generally  approved. 

Rationing  the  people.  That  school  of  social  philosophers 
who  hold  that  all  forms  of  competition  are  inherently  evil,  and 
that  therefore  government  compulsion  and  regimentation  should 
be  made  use  of  to  stop  competition,  would,  if  they  were  con- 
sistent, desire  to  begin  with  sumptuary  regulations.  As  stated 
in  a  previous  chapter,  there  are  three  main  forms  of  economic 
competition,  —  competitive  production,  competitive  bargain- 
ing, and  competitive  consumption,  —  and  of  these  three  com- 
petitive consumption  is  infinitely  worse  than  either  of  the 
others.  By  an  authoritative  standardization  of  wearing  apparel, 
food,  and  other  forms  of  consumption  we  should  tend  to 
eliminate  this  worst  form  of  competition.  That  would  involve, 


494          PRINCIPLES  OF  POLITICAL  ECONOMY 

of  course,  the  organization  of  society  on  a  semimilitary  basis, 
though  the  object  need  not  be  military  conflict.  It  would 
mean  the  prescribing  of  a  satisfactory  uniform  for  all  members 
of  the  community,  and  also  of  a  uniform  diet  or  ration. 
Houses,  furniture,  and  other  consumable  goods  would  also  have 
to  be  standardized  and  prescribed  by  government  regulations. 

There  is  no  doubt  whatever  that  if  the  people  would  accept 
this  kind  of  regimentation  and  work  cheerfully  under  it,  we 
should  prevent  the  waste  of  a  vast  amount  of  energy  and 
avoid  many  petty  jealousies  and  heartburnings.  Academic 
costume,  whatever  may  be  said  against  it  on  other  grounds, 
has  the  advantage  of  saving  academicians  a  great  deal  of  per- 
plexity over  the  question,  "  Wherewithal  shall  we  be  clothed  ?  " 
The  costumes  and  vestments  of  certain  religious  orders  answer 
the  same  purpose.  There  are  also  many  religious  sects,  of 
which  the  Quakers  of  the  old  school  were  a  good  illustration, 
which  succeeded  in  saving  their  people  from  that  destructive 
form  of  competition  which  strives,  first,  to  outshine  one's 
neighbors  in  matters  of  dress  and,  second,  not  to  be  outshone 
by  one's  neighbors. 

In  a  time  of  great  national  crisis  we  have  many  illustrations 
of  what  people  may  accomplish  in  the  way  of  economy  and 
effort  by  putting  the  whole  nation  on  a  fixed  ration  and  also 
by  prescribing  the  manner  of  dress  of  each  class  of  the  nation. 
If  the  people  would  submit  cheerfully  to  similar  regulations  in 
time  of  peace,  all  the  vast  energy  which  in  time  of  war  is 
devoted  to  the  work  of  destruction  could  then  be  turned  to 
the  work  of  production,  and  industrial  progress  could  proceed 
at  a  stupendous  rate.  It  is  not  impossible  that  at  some  time 
in  the  future  there  may  be  a  real  effort  on  the  part  of  certain 
ambitious  nations  to  economize  their  energy  in  this  way  in  order 
that  they  may  increase  their  strength  rapidly  in  preparation 
for  Armageddon. 


CHAPTER  XLII 
THE  BATTLE  OF  THE  STANDARDS 

Competitive  and  cheap  standards  of  living.  It  has  generally 
been  taken  for  granted  that  the  cheap  standard  of  living  would 
drive  out  a  dear  standard.  It  is  asserted  that  people  who  are 
willing  to  live  and  multiply  on  a  very  small  income  will  always 
tend  to  displace  those  who  are  unwilling  to  live  and  multiply 
except  on  a  liberal  income.  If  sheep  and  cattle  are  allowed  to 
multiply  and  wander  at  will  over  the  western  ranges,  it  is  plain 
that  the  sheep  will  drive  out  the  cattle,  not  because  they  are 
superior  in  value  or  in  fighting  power,  but  merely  because 
they  are  able  to  nibble  closer  to  the  ground  and  to  live  where 
cattle  would  starve.  A  similar  law  appears  to  operate  through- 
out the  human  as  well  as  the  animal  world.  Those  who  can 
live  on  the  least  seem  at  times  to  be  able  to  drive  out  all 
others  by  eating  them  out  of  house  and  home. 

It  must  be  confessed  that  there  are  some  facts  which  seem 
to  support  this  conclusion.  The  American  laborers  on  the 
Pacific  coast  find  it  very  difficult  to  compete,  at  least  in  the 
unskilled  trades,  with  the  Chinese  and  the  Japanese.  On 
the  Atlantic  seaboard  employers  of  labor  have  been  able  to 
tap  various  reservoirs  of  cheap  labor,  first  in  northwestern 
Europe,  later  in  southern  and  eastern  Europe.  These  laborers, 
having  been  accustomed  to  very  small  incomes,  are  able  and 
willing  to  work  and  multiply  on  incomes  so  small  as  to  drive 
out,  at  once  or  ultimately,  either  the  American  laborers  or  the 
immigrant  laborers  of  a  previous  immigration.  The  later  immi- 
grants drive  the  earlier  immigrants  out  directly  by  accepting 
lower  wages  than  the  earlier  immigrants  are  willing  to  accept ; 
they  drive  them  out  indirectly  by  multiplying  rapidly  and  thus 

495 


496          PRINCIPLES  OF  POLITICAL  ECONOMY 

supplying  a  new  stock  of  labor  where  the  others  would  refuse 
to  multiply.  In  many  farming  communities  it  is  found  like- 
wise that  foreign-born  farmers,  who  are  willing  to  live  on  less 
than  the  American-born  farmers,  can,  if  necessary,  pay  either 
a  rent  or  a  price  for  land  which  would  bankrupt  the  American 
farmer  with  his  higher  cost  of  living.  Thus  the  land  tends  to 
pass  into  the  hands  of  those  farmers  with  the  cheap  standard 
of  living.  On  the  Pacific  coast,  again,  the  same  tendency 
shows  itself.  The  Chinese  and  Japanese  farmers  and  gardeners 
are  able  to  buy  land  and  pay  for  it  at  a  price  which  an  American 
farmer  with  his  higher  standard  of  living  would  find  impossible. 

A  cheap  standard  does  not  always  drive  out  a  dear  standard. 
It  must  be  pointed  out,  however,  that  not  every  people  with 
a  low  standard  of  living  have  high  competing  power.  The 
Mexican  peons  have  as  cheap  a  standard  of  living  as  the 
Chinese  coolies,  and  yet  they  do  not  compete  successfully  even 
with  Americans,  who  have  a  higher  standard  of  living.  In 
other  words,  there  must  be  coupled  with  a  cheap  standard  of 
living  considerable  industrial  efficiency.  With  equal  industrial 
efficiency,  the  race  with  a  cheaper  standard  of  living  seems  to 
have  the  advantage  in  economic  competition.  On  the  other 
hand,  with  an  equal  standard  of  living,  the  race  with  the 
higher  industrial  efficiency  has  the  same  advantage  in  economic 
competition.  In  fact,  we  find  that  even  with  a  more  expensive 
standard  of  living,  the  race  whose  industrial  efficiency  expands 
in  proportion  to  its  cost  of  living  holds  its  advantage  in 
economic  competition. 

Competing  power  is  equal  to  production  minus  consumption. 
This  brings  us  back  to  the  formula  which  was  used  in  a  pre- 
vious chapter  to  express  the  value  of  a  man  :  V=  P—  C.  The 
value  of  a  man  is  equal  to  his  production  minus  his  consump- 
tion. By  his  value  we  mean  his  value  to  his  race  or  nation. 
That  which  he  adds  to  the  total  resources  of  his  nation  in  ex- 
cess of  what  he  extracts  from  those  resources  is  his  net  con- 
tribution to  the  strength  of  the  nation.  The  nation  will  be 


THE  BATTLE  OF  THE  STANDARDS  497 

strongest,  in  the  long  run,  whose  average  citizen  has  the  highest 
value  in  this  sense.  That  nation  will  be  weakest,  in  the  long 
run,  whose  average  citizen  has  the  lowest  value  in  this  sense. 
But  that  citizen's  value  may  be  increased,  not  simply  by  reduc- 
ing his  consumption  but  by  increasing  the  difference  between 
his  consumption  and  his  production.  Adding  to  his  produc- 
tion is  just  as  essential  as  keeping  his  consumption  within 
efficient  bounds. 

If  we  seek  a  formula  which  will  express  the  competing 
power  of  a  whole  nation,  it  must  be  very  closely  related  to  the 
formula  which  expresses  the  value  of  one  of  its  citizens.  That 
formula  is  CP=P—C;  that  is,  the  competing  power  of  a 
nation  is  equal  to  its  production  minus  its  consumption.  The 
nation  or  the  race  in  which  there  is  the  widest  margin  between 
production  and  consumption  will  win  in  economic  competition 
against  all  comers.  If  the  American  farmer  were  enough  more 
efficient  as  a  producer  than  the  foreign-born  farmer  to  com- 
pensate for  his  higher  cost  of  living,  he  could  hold  his  own 
indefinitely  in  economic  competition.  It  is  not,  therefore,  the 
cheap  standard  of  living  which  invariably  wins ;  it  is  the  effi- 
cient standard  of  living.  A  race  with  an  expensive  standard  of 
living,  provided  every  dollar  of  expense  adds  something  to  its 
productive  efficiency,  will  always  win  in  competition  with  a  race 
with  a  cheap  standard  of  living.  If,  however,  the  expensive 
standard  is  made  expensive  merely  by  the  demand  for  luxuries 
and  means  of  dissipation,  the  race  is  hopelessly  handicapped 
and  must  ultimately  lose  in  competition  with  other  races.  But 
if  the  cost  of  living  is  made  high  by  the  demand  for  strength- 
giving  food  and  recreation,  for  means  of  mental  stimulation, 
or  for  books,  instruments  of  precision,  and  other  means  of  tech- 
nical education,  such  a  standard  of  living  may  increase  the  mar- 
gin between  production  and  consumption  rather  than  diminish 
it.  In  that  case,  not  only  can  the  race  possessing  such  a  stand- 
ard of  living  hold  its  own  in  competition  at  home,  but  the 
members  of  that  race  can  go  anywhere  in  the  world  and  hold 


498          PRINCIPLES  OF  POLITICAL  ECONOMY 

their  own  in  competition  against  the  natives.  Such  a  race  will 
be  an  expanding,  colonizing  race ;  wherever  its  members  plant 
themselves,  they  will  succeed  and  remain ;  whereas,  if  their 
standard  of  living  is  merely  expensive  without  being  efficient, 
they  are  likely  to  fail  as  colonizers.  In  the  West,  when  such 
people  fail  and  return  to  the  East,  they  are  said  to  be  going 
back  East  to  live  with  their  wives'  folks. 

International  competition.  A  race  with  a  high  but  inefficient 
standard  of  living  sometimes  finds  it  necessary  to  protect  itself, 
at  least  within  its  own  boundaries,  against  the  competition  of 
races  with  a  cheaper  but  more  efficient  standard.  Otherwise 
they  would  find  themselves  ultimately  dispossessed  even  of  their 
land.  The  race  with  the  cheaper  and  more  efficient  standard 
would  not  only  get  the  jobs  in  industry,  but  would  eventually 
buy  the  farms  and  the  businesses  at  prices  which  the  natives 
would  be  unable  to  pay.  The  natives  would  give  way  before 
such  a  race  as  inevitably  as  before  an  army  equipped  with 
superior  weapons  of  offense. 

Moreover,  the  problem  is  not  solved  by  the  mere  exclusion 
from  our  own  territory  of  races  with  a  cheaper  and  more  effi- 
cient standard  of  living.  The  conflict  is  merely  changed  to 
another  field  and  the  outcome  postponed  to  a  more  remote 
period  of  time.  International  competition  is  just  as  real  as  in- 
dividual competition  within  the  nation,  though  it  does  not 
seem  so  real  to  the  average  person.  In  the  competition  for 
the  markets  of  the  world  the  race  with  the  cheaper  and  more 
efficient  standard  will  have  the  same  advantage  as  it  would 
have  in  getting  jobs  or  in  buying  farms  and  businesses  within 
the  confines  of  a  given  country. 

The  race  with  the  expensive  or  inefficient  standard  may 
hold  certain  advantages  because  of  the  peculiarities  of  its  geo- 
graphical situation.  If  it  possesses  superior  soil  or  superior 
mineral  deposits,  these  physical  advantages  may  compensate,  in 
part  at  least,  for  the  inefficiency  of  its  standard  of  living  and 
enable  it  to  survive  in  international  competition.  Superior 


THE  BATTLE  OF  THE  STANDARDS  499 

mineral  deposits,  however,  must  ultimately  be  exhausted. 
Superior  soil  can  be  maintained  only  by  wise  management.  The 
nation  that  depends  upon  these  material  advantages  for  its 
future  strength  in  international  competition  must  look  well  to 
its  problem  of  conservation.  If  it  does  not,  it  will  eventually 
lose  these  advantages,  and  then  its  more  expensive  standard 
of  living  will  place  it  under  a  severe  handicap.  If  so,  it  need 
not  necessarily  perish  as  a  nation,  but  at  best  it  will  live  at  a 
"  poor  dying  rate." 

Even  under  conditions  of  international  peace,  here  is  a  form 
of  international  rivalry  which  will  still  persist  and  under  which 
the  victory  must  ultimately  go  to  the  race  or  the  nation  with 
the  most  efficient  standard  of  living ;  that  is,  to  the  race  or 
nation  in  which  the  production  of  the  average  person  exceeds 
his  consumption  by  the  widest  margin. 

The  real  Armageddon.  Here  is  a  real  Armageddon,  the 
battle  field  of  the  nations,  —  the  place  for  the  ultimate  contest 
for  supremacy  among  the  various  races  and  nations  of  the  earth. 
This  is  the  field  where  every  nation  in  the  world  must  sooner  or 
later  be  brought  to  the  test  and  made  to  battle  for  its  very  exist- 
ence. It  is  a  peaceful  contest,  but  none  the  less  deadly  on  that 
account.  Preparedness  for  this  final  and  ultimate  conflict  will 
consist  in  the  study  of  standards  of  living  and  the  adoption  of 
such  standards  and  habits  as  will  increase  productive  efficiency 
to  the  maximum  and  reduce  the  cost  of  living  to  the  lowest 
point  which  is  consistent  with  maximum  productivity.  In 
the  interest  of  this  form  of  preparedness  it  will  be  well  for 
us  to  ponder  the  advice  of  Pythagoras  to  his  son  :  "  Choose 
those  habits  which  are  best ;  custom  will  make  them  the 
most  agreeable." 


PART  SIX 

PUBLIC  FINANCE 

Which  has  to  do  with  the  revenues  of  government  and  the  utilization  of 
those  revenues  by  government 

A  great  part  of  the  study  of  public  finance  has  to  do  with  the  technical  details 
of  the  administration  of  taxing  systems  and  the  control  of  public  expendi- 
tures.   Therefore  only  the  general  principles  of  taxation  are  discussed  in  this 
book,  which  is  a  book  for  beginners. 


501 


CHAPTER  XLIII 
TAXATION 

Classification  of  revenues.  The  government  as  distinct  from 
the  people  has  needs  of  its  own  and  must  have  revenue  out  of 
which  to  supply  those  needs.  There  are  various  sources  of 
public  revenue,  but  in  modern  times  the  chief  source  is  taxa- 
tion. Henry  C.  Adams,  in  his  work  on  finance,1  gives  the 
following  classification  of  public  revenue  : 

a.   Public  domains 

.  b.    Public  industries 
i.  Direct  revenue  J. 

c.  Gratuities  or  gifts,  or  treasure-trove 

d.  Confiscations  and  indemnities 


PUBLIC 
REVENUE 


2.  Derivative  revenue 


a.  Taxes 

b.  Fees 

c.  Assessments 


d.   Fines  and  penalties 

f  a.  Sale  of  bonds  or  other  forms  of 
_  3.  Anticipatory  revenue  \  commercial  credit 

^  b.   Treasury  notes 

In  former  times  the  public  domain  was  made  to  supply  a 
large  part  of  the  revenue  for  the  government.  In  fact,  under 
the  feudal  system,  property  in  land  and  something  resembling 
public  office  went  together.  The  king  had  his  own  demesne ; 
so  likewise  did  his  retainers  and  all  members  of  the  nobility. 
The  nobility  formed  the  chief  fighting  class  and  likewise  the 
administrators  of  local  government,  each  deriving  his  income 
from  the  lands  which  were  granted  to  him. 

Public  industries  have  not  figured  very  largely  as  sources  of 
public  revenue,  unless  royalties  from  mines  could  be  put  in  this 

1  The  Science  of  Finance,  p.  227.    New  York,  1899. 
S°3 


504          PRINCIPLES  OF  POLITICAL  ECONOMY 

class.  A  number  of  European  cities  have  derived  portions  of 
their  revenue  from  their  own  water,  gas,  and  electric-light 
plants.  Gratuities  and  gifts,  as  well  as  treasure-trove,  are  negli- 
gible sources  nowadays.  Confiscations  and  indemnities  belong 
to  a  lower  stage  of  civilization,  where  militancy  and  the  lust  for 
conquest  prevail.  In  all  civilized  governments  taxes  have  be- 
come the  chief  source  of  revenue,  fees,  assessments,  fines,  and 
penalties  forming  subsidiary  sources. 

What  is  a  tax?  A  tax  is  a  compulsory  payment  to  the 
government  for  which  the  government  does  not  return  to  the 
individual  payer  a  commodity  or  a  service.  The  money,  for 
example,  which  one  pays  for  a  postage  stamp  is  not  a  tax ;  it 
is  rather  a  purchase  of  a  service.  Where  a  municipality  owns 
its  own  water  supply  and  charges  water  rates,  these  rates  are 
not  in  any  proper  sense  taxes ;  they  are,  like  the  purchase  of 
postage  stamps,  payments  for  service.  The  same  is  true  of  the 
price  paid  for  any  direct  service  which  the  public  renders. 

To  be  sure,  the  public  renders  general  services  for  all  its 
taxes  ;  but  in  the  case  of  a  tax  there  is  no  attempt  to  apportion 
the  payment  exacted  of  the  individual  to  the  benefit  which  he 
as  an  individual  receives.  Doubtless  everyone  receives  some 
advantages  from  the  existence  of  an  army  or  a  navy,  of  courts, 
or  of  policemen ;  but  his  tax  is  not  of  the  nature  of  a  pur- 
chase, since  he  must  pay  the  tax  whether  he  thinks  he  is  get- 
ting anything  in  return  for  it  or  not,  and  the  amount  of  the 
tax  bears  no  relation  whatever  to  what  he  thinks  the  value  of 
the  service  of  the  State  may  be  to  him. 

Some  taxes  are  absolutely  compulsory.  Others  are  compul- 
sory only  conditionally.  An  income  tax,  an  inheritance  tax,  or  a 
poll  tax  is  absolutely  compulsory.  The  individual  has  no  choice 
in  the  matter.  An  excise  or  a  tariff  duty  may  be  avoided  by 
avoiding  the  use  of  the  articles  on  which  these  duties  are  levied. 
One  may  avoid  the  excise  duty  on  tobacco,  for  example,  by 
refraining  from  the  use  of  tobacco.  And  yet  when  one  pays 
this  tax,  he  is  not  receiving  from  the  government  a  service, 


TAXATION  505 

since  the  government  did  not  produce  the  tobacco  but  only 
charges  the  manufacturer  or  the  dealer  for  the  privilege  of 
manufacturing  and  selling. 

So-called  indirect  taxes.  The  taxes  just  described  are  gener- 
ally called  indirect  taxes.  In  case  of  a  tariff  duty,  for  example, 
the  importer  of  the  dutiable  article  pays  the  tax  directly  to  the 
government.  From  his  point  of  view  it  is  just  as  direct  as  any 
tax.  It  is  the  general  theory,  however,  that  the  consumers  of  the 
imported  articles  pay  the  tax  in  the  form  of  higher  prices.  In 
cases  where  that  happens  the  consumers  may  be  said  to  pay  the 
tax  indirectly.  This  is  by  no  means  always  the  case,  however,  and 
it  is  not  always  easy  to  determine  who  does  actually  pay  the  tariff 
duty.  It  is  therefore  doubtful  whether  or  not  the  term  indirect 
taxation  should  be  retained  in  economics.  All  real  taxes  are 
direct  in  the  sense  that  the  payers  pay  their  money  directly 
to  the  government.  In  some  cases,  however,  the  payer  is  able 
to  shift  the  tax  to  somebody  else  by  charging  a  higher  price 
for  a  product  or  by  paying  a  lower  price  to  the  one  from  whom 
he  himself  buys  the  product.  The  manufacturer  of  alcoholic 
liquor  pays  his  excise  duty  as  directly  to  the  government  as  any 
other  tax ;  but  if  he  charges  the  consumer  a  higher  price  for 
the  liquor,  the  consumer  is  then  said  to  pay  the  tax  indirectly ; 
but  he  may  also  pay  the  producer  of  the  raw  materials  a  lower 
price,  and  in  that  case  it  is  the  producer  who  pays  the  tax,  in 
part  at  least ;  and  if  the  manufacturer  carries  a  part  of  the 
burden  which  he  is  unable  to  shift  to  someone  else,  he  him- 
self bears  that  burden  directly,  not  indirectly. 

Taxes  and  monopoly  price.  A  common  abuse  of  the  word 
taxation  is  to  apply  it  to  monopoly  price  by  saying  that  the 
monopoly  taxes  the  people.  It  is  sufficient  in  a  case  of  this 
kind  to  say  that  the  monopoly  charges  too  high  a  price,  or 
a  monopoly  price ;  it  does  not  add  anything  to  the  clarity  of 
the  discussion  to  bring  in  the  word  tax.  Where  the  mo- 
nopoly sells  a  commodity  or  a  service,  even  though  it  sells 
it  above  cost,  the  individual  gets  what  he  thinks  ought  to 


506          PRINCIPLES  OF  POLITICAL  ECONOMY 

be  the  equivalent  of  what  he  pays ;  otherwise  he  would  not 
have  purchased  the  article.  Similarly,  the  government  might, 
if  it  chose,  charge  more  for  postage  stamps  than  the  cost  of 
carrying  the  parcels.  This  would  not  properly  be  called  a 
tax ;  the  proper  expression  would  be  to  say  that  the  govern- 
ment is  charging  a  high  price. 

Eliminating  compulsion  in  public  business.  Even  where  the 
government  derives  a  part  of  its  revenue  from  a  public  industry, 
the  element  of  compulsion  is  generally  present.  If  the  revenue 
from  the  industry  does  not  pay  the  expenses,  the  industry  can- 
not become  bankrupt  and  its  affairs  be  wound  up  by  legal 
proceedings.  The  government  can  merely  tax  the  people  or 
derive  an  enforced  revenue  from  some  other  source  to  pay  the 
deficit ;  that  is,  it  can  use  its  power  of  compulsion  to  keep 
alive  an  unprofitable  industry,  whereas  an  individual  or  private 
corporation  lacking  the  power  of  compulsion  would  have  no 
power  to  keep  its  business  alive. 

Again,  it  will  generally  be  found  that  the  government  exer- 
cises some  compulsion  by  excluding  competitors  from  its  own 
particular  field.  No  one  is  allowed  to  compete  directly  with  the 
federal  post  office  in  carrying  first-class  mail.  The  govern- 
ment's power  of  compulsion  is  exercised  in  its  own  behalf.  In 
fact,  it  is  doubtful  if  there  is  a  case  on  record  where  any  gov- 
ernment has  succeeded  in  doing  anything  well  on  a  purely  vol- 
untary basis.  It  has  had  to  use  its  power  of  compulsion  at  some 
point  or  other  in  the  enterprise.  It  has  either  raised  funds  by 
compulsion  or  excluded  competitors  by  compulsion,  has  re- 
pressed opposition  and  criticism  by  compulsion,  or  in  some 
other  way  made  use  of  this  great  advantage  which  it  possesses 
over  all  private  organizations  in  order  to  insure  its  success. 

These  observations  are  made  not  for  the  purpose  of  criti- 
cizing or  opposing  government  enterprise,  but  merely  in  the 
interest  of  truth  and  accuracy.  Government  is  compulsion ; 
and  when  properly  exercised,  compulsion  is  beneficent.  One 
of  the  great  and  really  unsettled  questions,  however,  is  as  to 


TAXATION  507 

the  limits  within  which  compulsion  is  beneficent  and  beyond 
which  it  is  interference. 

Earmarks  of  a  good  revenue  system.  Henry  C.  Adams  gives 
the  following  as  the  marks  of  a  good  revenue  system,  (i)  It 
must  be  adequate  to  the  just  wants  of  the  state.  (2)  It  must 
present  itself  as  a  system  and  not  as  an  aggregation  of  inde- 
pendent and  unrelated  acts.  (3)  In  a  federated  government 
such  as  we  have  in  the  United  States  the  revenue  domain  of 
one  branch  of  the  government  should  not  encroach  upon  the 
revenue  domain  of  another  in  such  a  way  as  to  bring  confu- 
sion. In  other  words,  there  must  be  harmony  and  balance 
between  the  central  and  local  governments,  between  the  local 
governments  themselves,  and  between  the  several  organizations 
of  local  government.  (4)  It  should  provide  for  elasticity  of  the 
revenue  at  the  point  where  elasticity  is  needed ;  that  is,  the 
revenue  must  be  capable  of  increase  and  decrease  whenever 
and  wherever  it  is  needed. 

Double  taxation.  The  second  of  these  is  of  particular  im- 
portance in  the  United  States  of  America.  Paraphrasing  the 
famous  rule  of  the  Donnybrook  Fair,  we  have  apparently  fol- 
lowed the  rule,  "Wherever  you  see  a  thing,  tax  it."  This  has 
led  to  a  great  deal  of  confusion,  —  to  double  taxation  in  some 
cases  and  to  complete  escape  from  taxation  in  others.  By  double 
taxation  is  meant  taxing  an  individual  or  different  individuals 
twice  for  the  same  thing.  If,  for  example,  a  farmer  owns  a 
piece  of  land  and  also  has  in  his  possession  a  piece  of  paper 
called  a  deed  to  the  land,  and  if  he  is  taxed  once  on  the  land 
and  again  on  the  deed  to  the  land,  that  is  obviously  a  case 
of  double  taxation.  If,  however,  one  farmer  owns  a  piece  of 
land  and  another  owns  a  mortgage  on  it,  the  owner  of  the 
mortgage  is  virtually,  if  not  literally,  a  part  owner  of  the  land. 
If,  now,  the  farmer  pays  taxes  on  the  full  value  of  the  land, 
and  the  mortgage  owner  pays  on  the  full  value  of  the  mortgage, 
there  is  an  equally  clear  case  of  double  taxation.  The  double 
tax  really  falls  on  the  farmer,  because,  where  mortgages  are 


508  PRINCIPLES  OF  POLITICAL  ECONOMY 

taxed,  the  interest  rates  are  made  higher  in  order  to  recoup 
the  lender  for  the  tax  which  he  has  to  pay. 

At  the  present  time  our  federal  government  is  selling  large 
numbers  of  bonds  bearing  3^  per  cent  interest.  One  of  the 
arguments  is  that,  since  they  are  free  from  taxation,  one 
receives  practically  as  much  net  income  as  he  would  receive 
on  taxable  property  yielding  nominally  5  per  cent  but  being 
taxed  i-|  per  cent.  Where  mortgages  are  not  taxed,  the  same 
argument  would  apply  and  would  be  effective.  If  in  one  state 
a  lender  is  compelled  to  pay  a  1 1  -per-cent  tax  on  his  mortgage, 
and  in  another  state  he  does  not  have  to  pay  any  tax,  if  he  is 
an  honest  man  he  would  as  lief  lend  at  3^  per  cent  in  the 
latter  state  as  at  5  per  cent  in  the  former.  If  he  is  dishonest, 
however,  he  may  take  his  chances  on  avoiding  taxation  in  the 
former,  and  if  he  succeeds  he  may  receive  his  5  per  cent  net. 
Again,  where  a  corporation  owns  certain  amounts  of  visible 
property,  but  the  shareholders  have  pieces  of  paper  as  evidences 
of  their  ownership  in  undivided  shares  of  this  property,  if  the 
visible  property  is  taxed  and  the  individuals  are  also  taxed  on 
the  pieces  of  paper  which  they  hold  as  evidences  of  ownership, 
the  effect  is  very  much  the  same  as  though  the  farmer  were 
taxed  on  his  farm  and  also  on  the  deed  which,  like  the  share 
in  a  corporation,  is  only  an  evidence  of  ownership. 

Overlapping  of  tax  systems.  The  third  of  these  marks  of 
a  good  system  is  also  important  in  this  country.  The  conflict 
of  jurisdictions  between  federal  and  state  governments,  and 
between  the  state  governments  themselves,  has  produced  a 
great  deal  of  confusion  and  also  a  great  deal  of  double  taxa- 
tion. Various  remedies  for  this  situation  have  been  proposed, 
among  others  the  subdivision  of  the  various  sources  of  reve- 
nue, each  grade  of  government  to  be  allowed  its  own  par- 
ticular source.  The  federal  government,  for  example,  is  by 
the  Constitution  given  exclusive  right  to  levy  duties  on  im- 
ports. Since  no  state  or  municipality  is  permitted  to  enter 
this  field,  there  is  no  confusion  there.  It  has  also  been 


TAXATION  509 

suggested  that  real-estate  taxes  should  be  left  exclusively  to 
the  local  governments,  —  municipalities,  counties,  and  town- 
ships. It  is  thought  by  certain  writers  that  licenses  and  fran- 
chises also  should  be  left  exclusively  to  local  governments. 
Incomes  and  inheritances  would  seem  to  be  suitable  subjects 
for  state  taxation.  Stamp  taxes  of  various  sorts  must  appar- 
ently be  left  to  the  federal  government. 

No  very  clear  dividing  line  has  been  generally  agreed  upon 
for  the  separation  of  federal  from  state  sources  of  revenue. 
Certain  writers  of  high  authority  hold  that  the  income  tax 
should  belong  exclusively  to  the  states  and  that  the  federal 
government  should  keep  out  of  this  field.  Their  views,  how- 
ever, have  not  received  general  public  support.  We  already 
have  duplication  in  this  field ;  that  is,  in  most  of  our  states  we 
have  income  taxes  in  addition  to  the  federal  income  tax. 

Inelasticity  of  inheritance  taxes.  The  inheritance  tax  is  an 
excellent  source  of  revenue,  being  very  productive ;  but  it  should, 
from  the  nature  of  the  case,  be  a  permanent  tax  not  often  to  be 
changed.  In  the  course  of  a  generation  practically  every  estate 
will  pass  by  inheritance  and  be  taxed.  But  in  any  given  year 
or  decade  only  a  certain  percentage  of  them  will  pass  by  in- 
heritance and  be  taxed.  If,  therefore,  the  tax  is  changed  fre- 
quently, different  estates  will  bear  very  different  burdens.  If, 
during  a  few  years,  a  very  high  inheritance  tax  prevails,  the 
few  estates  that  pass  by  inheritance  during  those  years  will 
bear  a  heavy  burden  ;  and  if,  during  another  few  years,  there  is 
a  very  low  tax,  the  estates  which  pass  in  inheritance  during 
those  years  will  bear  a  very  light  burden. 

An  income  tax,  however,  may  be  changed  frequently  with- 
out injustice  to  individuals.  Everyone  who  receives  a  taxable 
income  is  likely  to  receive  it  every  year.  The  tax  may  be 
changed  every  year  without  showing  any  discrimination  in  favor 
of  or  against  individuals.  This  would  seem  to  make  it  neces- 
sary that  an  inheritance  tax  should  be  permanent  and  be  the 
source  of  a  considerable  revenue,  but  that  elasticity  should  be 


510          PRINCIPLES  OF  POLITICAL  ECONOMY 

secured  from  an  income  tax,  which  may  be  changed  frequently 
as  occasion  demands  an  increase  or  decrease  of  public  revenue. 

The  characteristic  form  of  American  taxation,  however,  is 
what  is  known  as  the  general  property  tax.  Nearly  every  state 
in  the  Union  has  had,  either  in  its  constitution  or  on  its  statute 
books,  laws  requiring  the  equal  taxation  of  all  forms  of  prop- 
erty. In  many  cases  this  has  worked  to  the  utter  confusion 
of  our  financial  system.  One  result  is  that  visible  property  is 
taxed  and  invisible  property  escapes.  The  farmer's  land  and 
buildings,  livestock  and  machinery,  can  scarcely  be  hidden,  and 
the  assessor  finds  them.  Many  of  the  intangible  and  invisible 
forms  of  property,  however,  are  difficult  to  find  and  can  fre- 
quently escape  taxation.  Strange  as  it  may  seem,  many  rural 
districts  show  a  larger  percentage  of  personal  property  and  a 
smaller  percentage  of  real  estate  than  most  of  our  cities,  be- 
cause much  of  the  farmer's  personal  property  (machinery,  tools, 
etc.)  is  of  a  kind  that  cannot  well  be  hidden.  No  one  really 
believes  that  farmers  own  a  larger  percentage  of  personal 
property  and  a  smaller  percentage  of  real  estate  than  city 
people,  and  yet  the  assessors'  books  indicate  that  they  do. 

Progressive  taxation.  Various  expedients  have  been  adopted 
to  make  taxes  more  just  than  they  are  under  the  crude  general 
property  tax.  Among  these  laws  one  of  the  most  important 
is  what  is  known  as  the  graduated  or  progressive  tax.  This 
may  apply  either  to  general  property,  to  incomes,  or  to  inherit- 
ances. The  principle  of  the  progressive  tax  is  that  the  larger 
the  sum  to  be  taxed,  the  higher  the  rate  of  taxation.  To  begin 
with,  even  an  exemption  operates  to  a  slight  extent  as  a  pro- 
gressive tax.  An  income  tax  which  exempts,  let  us  say,  $2000 
from  all  taxation  and  taxes  only  the  excess  above  $2000  is 
slightly  progressive,  even  though  it  is  nominally  proportional. 
A  tax  of  I  per  cent  on  the  excess  over  $2000  would  work 
somewhat  as  follows  :  On  $3000  the  tax  would  be  $10,  which 
is  one  third  of  I  per  cent  on  the  whole  income ;  on  $4000  the 
tax  would  be  $20,  which  is  one  half  of  i  per  cent  on  the  whole 


TAXATION  5 1 1 

income  ;  on  $6000  the  tax  would  be  $40,  which  is  two  thirds 
of  i  per  cent  on  the  whole  income. 

A  genuinely  progressive  tax,  however,  proceeds  farther  than 
this.  It  begins,  let  us  say,  with  a  i-per-cent  tax  on  the  excess 
above  $2000,  i  per  cent  more  on  the  excess  above  $10,000, 
and  i  per  cent  more  on  the  excess  above  $50,000,  and  so  on. 
Under  this  scheme,  then,  the  individual  who  had  an  income 
of  $60,000  a  year  would  pay  i  per  cent  on  $58,000  (the  ex- 
cess above  $2000),  2  per  cent  on  $50,000  (the  excess  above 
$10,000),  and  3  percent  on  $10,000  (the  excess  above  $50,000), 
making  a  total  of  $1880.  Whether  the  tax  be  an  income  tax, 
an  inheritance  tax,  or  a  tax  on  general  property,  the  principle 
of  the  graduated  tax  is  the  same. 

Canons  of  taxation.  Adam  Smith,  in  his  "Wealth  of  Nations," 
laid  down  what  have  since  his  day  been  called  the  canons  of 
taxation.  They  are  as  follows  : 

(i)  The  subjects  of  every  state  ought  to  contribute  towards  the  support 
of  the  government,  as  nearly  as  possible,  in  proportion  to  their  respective 
abilities ;  that  is,  in  proportion  to  the  revenue  which  they  respectively  enjoy 
under  the  protection  of  the  state.  ...  (2)  The  tax  which  each  individual  is 
bound  to  pay  ought  to  be  certain,  and  not  arbitrary.  The  time  of  payment, 
the  manner  of  payment,  the  quantity  to  be  paid,  ought  all  to  be  clear  and 
plain  to  the  contributor,  and  to  every  other  person. ...  (3)  Every  tax  ought  to 
be  levied  at  the  time,  or  in  the  manner  in  which  it  is  most  likely  to  be  con- 
venient for  the  contributor  to  pay  it. ...  (4)  Every  tax  ought  to  be  so  contrived 
as  both  to  take  out  and  to  keep  out  of  the  pockets  of  the  people  as  little  as 
possible  over  and  above  what  it  brings  into  the  public  treasury  of  the  state.1 

The  first  of  these  relates  to  the  general  question  of  justice  ; 
the  others  are  so  obviously  practical  and  expedient  that  there 
has  never  been  any  serious  discussion  of  them.  A  great  deal 
of  discussion,  however,  has  centered  round  the  first.  Just  what 
is  meant  by  "in  proportion  to  their  respective  abilities  "  has 
never  been  definitely  decided.  At  first  thought  it  sounds  as 
though  this  meant  proportional  rather  than  progressive,  or 

1  Adam  Smith,  The  Wealth  of  Nations,  Vol.  II,  pp.  414,  415,  416. 


512          PRINCIPLES  OF  POLITICAL  ECONOMY 

graduated,  taxation.  If  we  assume  that  a  man's  ability  is  in 
exact  proportion  to  his  income,  then  obviously  if  he  pays  in 
proportion  to  his  ability  he  must  pay  in  proportion  to  his  in- 
come. But  it  is  contended  that  a  man's  ability  to  pay  increases 
more  than  in  proportion  to  his  income,  and  that  therefore  if 
he  pays  in  proportion  to  his  ability,  he  must  pay  a  progressive, 
or  graduated,  tax  on  his  income  or  his  property.  That  there  is 
some  justification  for  this  opinion  is  evidenced  by  the  almost 
universal  practice  of  exempting  a  certain  minimum.  The  indi- 
vidual whose  income  is  barely  able  to  support  him  and  his 
family  may  be  said  literally  to  have  no  ability  to  pay  taxes,  and 
yet  he  has  an  income.  If  his  income  is  slightly  greater  than 
necessary  to  support  himself  and  his  family,  then  he  may  be 
said  to  have  some  ability  to  pay  taxes.  This  obviously  calls 
for  a  certain  degree  of  progression  in  the  way  of  taxation. 

Repressive  taxation.  The  tendency  is  more  and  more  for 
expert  opinion  to  favor  some  sort  of  progressive,  or  graduated, 
taxation  as  more  just  than  proportional  taxation.  Just  how  far 
in  this  direction  we  should  go  is  not  easy  to  determine.  It  is 
never  wise  to  kill  the  goose  that  lays  the  golden  eggs.  Neither 
is  it  ever  wise  to  tax  anyone  so  heavily  as  to  drive  him  out 
of  productive  business.  If  taxes  are  ever  made  so  heavy  upon 
people  who  are  carrying  any  large  enterprises  as  to  discourage 
accumulation,  enterprise,  and  thrift,  the  state  will  be  doing 
itself  an  injury.  Professor  E.  A.  Ross1  has  suggested  a  new 
canon  of  taxation  to  add  to  the  four  which  Adam  Smith  gave 
us  :  A  tax  should  be  as  little  repressive  as  possible. 

The  sum  and  substance  of  all  sound  taxation  is  that  the 
taxes  should  be  as  little  burdensome  as  possible.  The  burden 
of  a  tax  is  twofold.  There  is,  in  the  first  place,  the  disadvan- 
tage to  the  payer  of  the  tax.  It  is  a  loss  to  him  to  have  to 
give  up  his  revenue.  In  the  second  place,  there  is  the  dis- 
couragement to  enterprise  which  a  heavy  tax  involves.  This  is 

1  "  A  New  Canon  of  Taxation  "  (abstract),  Publications  of  the  American 
Economics  Association  (1893),  Vol.  VIII,  pp.  49-50. 


TAXATION  513 

particularly  disastrous  when  the  government  is  irregular  and 
whimsical  in  its  taxing  moods.  When  producers  never  know 
what  to  expect  from  the  government  and  its  tax  collectors, 
they  have  little  inducement  to  enterprise.  Under  such  condi- 
tions there  will  be  little  wealth  produced  for  the  government 
to  tax,  and  things  are  likely  to  go  on  from  bad  to  worse. 

In  case  there  are  undesirable  businesses  which  the  govern- 
ment does  not  care  to  prohibit,  or  undesirable  habits  which 
the  government  does  not  care  to  suppress,  the  repressive 
power  of  taxation  may  be  used.  Men  may  then  be  made  to 
pay  for  their  folly,  or  to  give  up  their  folly  to  avoid  taxation. 
In  extreme  cases  complete  suppression  is  doubtless  better 
than  mild  repression  ;  in  milder  cases,  such  as  luxurious  con- 
sumption, ostentatious  dressing,  etc.,  the  mildly  repressive 
effect  of  a  tax  is  desirable. 


CHAPTER  XLIV 
THE  FINANCING  OF  A  WAR 

What  is  meant  by  the  financing  of  a  war.  By  the  financing 
of  a  war  is  meant  the  keeping  of  the  National  Treasury  sup- 
plied with  money  with  which  to  purchase  military  supplies  and 
pay  other  war  expenses.  This  problem  should  be  kept  distinct 
from  the  physical  problem  of  producing  supplies  and  war 
materials.  The  latter  is  a  problem  not  for  the  financial  expert 
but  rather  for  the  industrial  engineer,  the  business  manager, 
or  some  other  expert  in  the  organization  and  coordination  of 
the  factors  of  physical  production.  While  the  financial  prob- 
lem is  one  of  tremendous  importance,  it  is  not  only  less 
important  but  also  very  much  less  difficult  than  that  of  pro- 
ducing the  supplies  themselves. 

Financial  problems  less  difficult  than  problems  of  production. 
Difficult  as  is  the  financial  problem,  all  the  factors  are  within 
the  control  of  the  government,  or  at  least  of  the  people  behind 
the  government.  Consequently,  if  they  fail  in  their  attempts 
to  handle  the  problem,  they  have  only  themselves  to  blame ; 
their  failure  cannot  be  laid  to  the  physical  difficulties  or  to 
factors  which  lie  beyond  their  own  control.  In  short,  the  fail- 
ure will  be  due  to  the  stupidity  of  their  rulers  or  of  the  people 
who  refuse  to  support  a  sound  financial  policy  on  the  part  of 
the  rulers.  The  problem  of  producing  supplies,  on  the  other 
hand,  especially  on  the  part  of  a  beleaguered  country,  may 
depend  upon  factors  which  lie  beyond  the  control  of  either 
government  or  people.  For  example,  the  difficulties  of  the 
South  during  the  Civil  War  were  on  the  physical  side  insuper- 
able ;  they  were  hemmed  in  by  blockading  fleets  and  invading 
armies.  On  the  financial  side,  however,  their  difficulties  were 


THE  FINANCING  OF  A  WAR  515 

of  their  own  creation.  In  other  words,  the  difficulties  in  the 
way  of  supplying  themselves  with  horses,  salt,  nitrogen,  and 
a  number  of  other  necessaries  were  insuperable,  but  the  diffi- 
culties which  they,  as  well  as  the  Northern  people,  had  in  find- 
ing money  with  which  to  pay  for  such  supplies  as  they  could 
get  were  within  their  own  control. 

In  most  of  our  discussions  of  the  problems  of  war  finance, 
too  little  attention  is  given  to  certain  large  elementary  princi- 
ples. The  practical  financiers  are  fully  absorbed  with  the  details 
of  the  problem,  and  the  financial  writers  in  the  ephemeral  press 
are  more  concerned  with  finding  out  what  the  people  want  them 
to  say,  and  then  saying  it,  than  they  are  in  getting  at  the  root 
of  the  problem. 

Speeding  up  the  circulation  of  money.  One  large  economic 
fact  which  greatly  simplifies  the  financing  of  a  war  is  that  an 
increase  in  the  rapidity  of  the  circulation  of  money  has,  in  all 
essential  particulars,  the  same  effect  as  an  increase  in  the 
physical  quantity  of  money.  To  double  the  speed  of  circula- 
tion, for  example,  enables  a  given  quantity  of  money  to  do 
twice  as  much  work.  Analogies,  though  often  dangerous,  are 
sometimes  useful.  A  useful  one  is  found  between  the  circula- 
tion of  blood  in  the  human  system  and  the  circulation  of  money 
in  the  country.  When  increased  muscular  exertion  calls  for 
increased  supplies  of  blood  in  the  limbs,  it  is  not  necessary 
to  increase  the  total  volume  of  blood ;  the  need  is  met  by  in- 
creasing the  rapidity  of  the  circulation.  But  in  order  that  the 
heart  may  send  increasing  quantities  of  blood  per  unit  of  time 
to  those  parts  where  it  is  demanded,  it  must  have  means  of 
getting  increased  quantities  per  unit  of  time  back  again  from 
tne  extremities ;  in  other  words,  the  problem  of  getting  the 
blood  back  again  is  obviously  as  important  as  that  of  pumping 
it  out  to  the  places  where  it  is  needed.  The  National  Treasury 
is  confronted  by  a  similar  problem  in  time  of  war.  It  is  called 
upon  to  send  out  money  in  increasing  quantities  to  pay  the 
enormously  increased  expenses  of  the  government.  In  order 


516          PRINCIPLES  OF  POLITICAL  ECONOMY 

that  it  may  always  have  sufficient  money  to  pay  out  for  war 
supplies  at  an  extraordinary  rate,  it  must  find  means  of  getting 
it  back  again  at  the  same  extraordinary  rate.  Since  all  the 
money  not  actually  in  the  Treasury  is  in  the  hands  of  the  peo- 
ple, it  is  they  who  must  be  induced  to  return  it  to  the  Treasury 
at  this  extraordinary  rate.  If  the  rulers  can  devise  a  plan  for 
doing  this,  and  if  the  people  are  sufficiently  wise,  devoted,  and 
loyal  to  support  the  plan,  there  will  be  no  difficulty  in  the 
financing  of  a  war.  These  are  two  very  large  "  ifs." 

More  money  not  absolutely  necessary.  Another  large  fact 
of  even  greater  importance  is  that  the  country,  as  distinct  from 
its  government,  does  not  need  very  much  more  money  in  time 
of  war  than  in  time  of  peace,  except  for  the  purchase  of  for- 
eign supplies.  So  far  as  its  domestic  economy  is  concerned, 
it  needs  only  a  little  more.  There  are  not  many  more  men  to 
be  hired  ;  there  is  not  much  more  work  which  can  be  done, 
because  there  are  not  many  more  men  to  do  it ;  and  there  are 
not  many  more  goods  to  be  bought  in  time  of  war  than  in  time 
of  peace.  The  difference  is  that  the  government,  instead  of 
private  individuals,  must  hire  the  men  and  buy  the  goods. 
This  makes  it  physically  necessary  that  private  individuals 
should  hire  fewer  men  and  buy  fewer  goods. 

Private  consumption  must  be  cut  down.  For  example,  when 
I  am  spending  my  income  in  time  of  peace,  I  am  merely  hiring 
men  to  make  things  for  my  consumption  and  to  wait  upon 
me.  All  the  men  in  the  country  are  presumably  engaged  in 
producing  things  for  consumers  and  in  waiting  upon  them, 
that  is,  upon  one  another.  In  time  of  war  it  is  necessary  that 
a  large  number  of  men  stop  producing  things  for  private  con- 
sumption and  waiting  upon  one  another  as  private  consumers, 
and  begin  to  produce  things  for  the  government  and  to  wait 
upon  the  government  and  serve  it  as  soldiers.  It  is  physically 
impossible  for  them  to  do  this  unless  private  consumers  are 
willing  to  consume  less,  and  to  wait  upon  themselves  instead 
of  hiring  others  to  do  so.  Moreover,  it  need  not  take  any 


THE  FINANCING  OF  A  WAR  517 

more  money  to  hire  these  men  to  work  for  the  government 
than  to  hire  them  to  work  for  private  consumers. 

If,  for  example,  I  am  spending  so  much  on  myself  that  it 
takes,  in  the  aggregate,  ten  men  to  make  things  for  my  con- 
sumption and  to  wait  upon  me,  it  will  be  necessary  in  time  of 
war  for  me  to  live  on  less,  because  the  government  must  have 
some  of  those  ten  men.  Another  way  of  saying  the  same  thing 
would  be  to  say  that  I  need  these  ten  men  to  work  for  me  in 
another  capacity  in  time  of  war ;  I  need  them  to  produce  war 
supplies  and  fight  in  my  defense.  The  government  is  my 
agent  in  hiring  these  men  and  directing  the-  fighting ;  there- 
fore I  must  turn  a  part  of  my  income  over  to  my  agent,  the 
government,  to  hire  some  of  those  ten  men,  while  I,  with  the 
remainder  of  my  income,  may  hire  the  rest  to  continue  work- 
ing for  me.  What  has  just  been  said  in  the  first  person  singu- 
lar can  be  repeated  in  the  first  person  plural,  and  thus  it  will 
include  us  all. 

The  private  consumer  bids  against  the  government  for  man 
power.  If  we  are  all  left  undisturbed  in  the  enjoyment  of  our 
income,  and  continue  spending  it  in  such  a  way  as  to  require 
as  many  men  as  before  to  produce  for  and  to  wait  upon  each 
of  us,  while  our  agent,  the  government,  without  taxing  us, 
undertakes  to  find  means  to  hire  the  men  whom  it  needs,  we 
shall,  each  and  every  one,  be  competing  for  these  men  against 
our  own  agent,  the  government.  If  the  government  opens  a  war 
chest,  or  gets  its  money  from  another  source  than  our  incomes, 
it  will  have  to  bid  against  us  to  get  men  to  work  and  to  fight 
for  it.  Literally,  the  government  will  be  trying  with  a  lot  of 
new  money  to  hire  them  away  from  us,  while  we  are  trying  with 
our  full  income  to  hire  them  away  from  the  government  and 
keep  them  working  for  us.  Aside  from  the  obvious  futility 
and  stupidity  of  this  process,  it  results  in  inflation  of  prices,  no 
matter  what  the  source  of  the  government's  money  may  be. 

Taxation  enforces  economy  in  private  consumption.  Here  is 
the  first  great  mistake  which  almost  every  government  has 


Si8          PRINCIPLES  OF  POLITICAL  ECONOMY 

made,  up  to  the  present  time,  in  its  efforts  to  finance  a  war : 
it  has  hesitated  to  tax  its  people.  The  only  sound  method  of 
financing  a  war  is  to  tax  the  people,  and  tax  them  to  the  bone. 
Unless  it  has  a  war  chest  which  it  can  open,  or  unless  it  issues 
a  lot  of  new  currency,  it  must  get  its  money  from  its  citizens, 
in  the  form  either  of  loans  or  of  taxes.  If  it  does  not  do  one 
of  these  things,  there  is  no  possibility  of  avoiding  that  conflict 
which  has  just  been  described.  Leaving  the  people  with  their 
incomes  and  purchasing  power  unimpaired  will  permit  them 
to  continue  spending  their  incomes  as  before,  and  that  spend- 
ing of  income  is  a  demand  for  men  to  produce  supplies  for 
private  consumption  and  to  wait  upon  the  consumers.  The 
only  way,  then,  in  which  the  government  can  get  these  men 
is  to  outbid  the  private  consumers  with  its  new  money.  This 
competition  between  the  private  consumers  and  the  govern- 
ment for  men  and  supplies  cannot  by  any  possibility  result  in 
anything  else  than  an  inflation  of  prices. 

Issuing  new  money  a  mistake.  Even  when  the  government 
has  accumulated  a  war  chest  of  specie,  this  money  will  be  used 
to  outbid  private  consumers  for  men  and  supplies,  which  will 
result  in  an  inflation  of  prices.  Where  the  government  issues, 
or  causes  to  be  issued,  a  lot  of  new  credit  currency,  in  order  to 
avoid  taxation,  the  difficulty  is  exaggerated,  for  there  is  not 
only  an  inflation  but  a  grave  danger  of  depreciation. 

Contrary  to  a  very  widely  accepted  theory,  there  may  be  an 
inflation  without  any  use  whatever  of  credit  currency,  though 
this  is  possible  only  where  a  large  quantity  of  standard  coin, 
or  metallic  money,  is  injected  into  the  circulation  after  having 
been  hoarded  in  the  public  treasury.  The  way  it  gets  into  cir- 
culation in  the  beginning  of  a  war  is  through  its  use  by  the 
government  in  purchasing  supplies  and  hiring  men ;  all  the 
private  individuals,  with  their  incomes  unaffected,  continue  pur- 
chasing supplies  and  hiring  men  as  before ;  and  it  is  this  com- 
petition of  the  government,  with  its  new  money,  against  private 
consumers,  with  their  old  money,  that  starts  prices  upward  and 


THE  FINANCING  OF  A  WAR  519 

causes  inflation.  It  makes  very  little  difference  whether  the 
new  money  which  the  government  uses  in  these  purchases  is 
coin  which  has  been  hoarded  or  credit  currency  which  is  issued 
for  a  special  purpose,  except  where  the  latter  becomes  so  ex- 
cessive in  quantity  as  to  cause  it  to  depreciate  in  terms  of  coin. 

Individuals  must  purchase  less  if  the  government  is  to  pur- 
chase more.  The  first  and  fundamental  conclusion,  therefore, 
is  that  in  order  to  avoid  inflation  the  people  must  purchase  less 
in  proportion  as  the  government  purchases  more.  The  only 
way  to  force  them  to  purchase  less  is  to  get  their  money  away 
from  them.  This  may  be  done  by  several  methods  as  follows : 

The  first  method  is  that  of  voluntary  loans.  People  who 
have  been  spending  their  money  for  other  things  may  be  in- 
duced to  spend  it  for  government  bonds.  They  must  then  cut 
down  their  purchases  of  supplies.  This  reduces  the  demand 
for  men  to  produce  supplies  for  private  individuals.  These 
men  who  are  released  from  general  industry  are  then  available 
to  be  hired  by  the  money  which  is  now  in  the  hands  of  the 
government.  This  cannot  result  in  inflation. 

Another  method  is  that  of  forced  loans,  —  the  comman- 
deering of  the  supplies  of  money  in  savings  banks  and  other 
places  of  deposit.  This  is  virtually  the  system  of  conscription 
as  applied  to  money.  Whatever  else  may  be  said  against  this 
method,  it  cannot  be  said  to  result  in  inflation,  because  the 
people  whose  money  is  taken  away  have  less  to  spend,  and 
therefore  they  do  not  compete  with  the  government  in  hiring 
men  and  buying  supplies. 

Still  another  method,  and  the  one  which  ought  always  to  be 
followed  as  far  as  possible,  is  that  of  taxation.  This  is  likewise 
a  system  of  conscription,  —  the  conscription  of  incomes  as  dis- 
tinguished from  the  conscription  of  men.  It  is  better  than 
the  forced  loan  because  it  applies  to  all  incomes  and  does 
not  penalize  those  who  have  shown  sufficient  frugality  and 
thrift  to  save  and  deposit  a  part  of  their  income  instead  of 
consuming  it  all. 


520          PRINCIPLES  OF  POLITICAL  ECONOMY 

The  most  futile  of  all  methods  is  that  of  issuing  temporary 
credit  currency,  to  be  repaid  out  of  war  indemnities  after  a 
victory.  There  is,  however,  one  condition  under  which  it  may 
be  necessary  for  the  government  to  have  available,  in  the  form 
either  of  a  war  chest  or  of  a  credit  currency,  a  new  supply  of 
money.  It  usually  takes  some  months  to  get  the  taxing  machin- 
ery going  so  as  to  increase  the  government's  income  mate- 
rially. It  may  be  necessary,  in  order  to  tide  over  these  few 
months,  to  make  use  of  some  extraordinary  reservoir  of  cur- 
rency. Usually,  however,  and  always  if  the  credit  of  the  gov- 
ernment is  good,  the  large  sums  needed  at  the  beginning  of 
a  war  can  be  secured  quickly  by  means  of  voluntary  loans. 
This  is  the  first  and  greatest  argument  in  favor  of  raising 
money  by  loans  rather  than  by  taxation. 

Another  argument  is  that  by  borrowing  the  money  the  finan- 
cial burdens  of  the  war  may  be  distributed  over  a  longer  period 
than  if  the  money  is  raised  by  taxation.  It  is  sometimes  said, 
rather  shamelessly  it  is  true,  that  the  people  have  burdens 
enough  in  time  of  war  without  having  to  pay  extraordinary 
taxes.  The  fact  is,  however,  that  those  who  do  not  go  as  sol- 
diers, or  give  their  services  directly  to  the  government,  bear 
no  burdens  whatever  except  taxes.  Most  of  them,  in  fact, 
prosper  in  time  of  war.  Many  a  respectable  family  is  still 
living  on  wealth  accumulated  out  of  the  profits  of  business 
during  our  Civil  War,  while  their  neighbors  were  spending 
their  time  in  the  unremunerative  work  of  the  soldier.  War  is 
not,  in  fact,  a  burden  upon  the  whole  generation.  It  is  a  bur- 
den only  upon  those  who  do  the  work  of  war  and  those  who 
pay  the  expenses  of  war.  If  war  taxes  are  not  increased, 
many  will  absolutely  escape  all  war  burdens.  The  question  is 
not,  therefore,  that  of  distributing  the  burden  over  several  gen- 
erations but  of  distributing  it  over  all  the  individuals  of 
each  generation. 

A  third  reason  for  borrowing  is  found  in  the  necessity  of 
purchasing  foreign  supplies.  In  time  of  war  the  national 


THE  FINANCING  OF  A  WAR  521 

production  of  articles  for  private  consumption  must  necessarily 
be  reduced  in  order  that  the  country  may  recruit  its  armies  and 
produce  military  supplies.  Consequently  it  cannot  send  so  much 
produce  abroad  ;  at  the  same  time  it  will,  in  all  probability, 
need  to  increase  its  imports  from  foreign  countries.  These 
imports,  therefore,  must  be  paid  for  largely  with  money.  In 
order  to  meet  these  foreign  payments,  extraordinary  sources  of 
monetary  supply  must  be  tapped ;  literally,  the  money  which 
is  sent  abroad  for  the  purchase  of  supplies  must  be  got  back 
again.  Since  the  foreign  countries  cannot  be  taxed,  it  must  be 
borrowed  back,  perhaps  over  and  over  again,  in  order  to  make 
continual  purchases.  Here  is  where  the  credit  of  the  country 
may  be  strained.  In  this  case,  however,  the  country's  finan- 
cial failure  would  be  due  primarily  to  its  inability  to  produce 
its  own  supplies,  rather  than  to  anything  inherent  in  the  prob- 
lem of  war  finance.  The  country  must  either  be  able  to  pro- 
duce its  own  supplies  or  else  have  credit  enough  to  buy  them 
from  abroad. 

Production  of  war  supplies  must  be  vastly  increased.  In 
considering  the  relative  merits  of  taxing  and  borrowing  as 
means  of  financing  a  war,  we  must  never  lose  sight  of  certain 
basic  and  incontrovertible  facts.  One  is  that  if  we  are  to  put 
several  million  men  into  the  army  and  navy,  it  will  be  neces- 
sary to  put  several  million  others  into  the  munition  factories, 
shipyards,  and  other  establishments  for  the  production  of  war 
supplies.  We  must  even  increase  the  output  of  our  mines 
and  especially  of  our  farms,  in  order  to  provide  the  raw 
materials  and  the  food  supplies.  All  this  will  require  a  good 
many  millions  of  men.  These  men  cannot  be  created  out 
of  nothing. 

Sources  of  additional  man  power.  There  are  three  sources 
from  which  this  additional  man  power  can  be  drawn.  In  the 
first  place,  those  who  are  now  at  work  may  work  a  little  harder, 
either  by  speeding  up  or  by  working  longer  hours.  In  the 
second  place,  those  who  are  not  now  at  work  may  be  put  tq 


522          PRINCIPLES  OF  POLITICAL  ECONOMY 

work.  In  the  third  place,  those  who  are  at  work  in  the  indus- 
tries which  are  not  indispensable  may  be  withdrawn  from  them 
in  order  to  expand  the  industries  that  are  indispensable  to  the 
prosecution  of  a  war. 

The  first  two  of  these  sources  of  man  power  may  be  suf- 
ficient if  the  war  is  to  prove  a  trivial  affair ;  but  if  it  is  to  be 
a  serious  affair,  we  shall  have  to  draw  upon  all  three,  and 
particularly  upon  the  third.  It  will  be  absolutely  impossible 
to  continue  running  the  luxury-producing  industries  or  the 
industries  which  produce  superfluities  at  the  rate  which  is 
possible  in  times  of  peace.  If  the  government  needs  the  man 
power  which  has  been  engaged  in  producing  luxuries  and 
superfluities,  individuals  must  perforce  cut  down  their  con- 
sumption of  such  things.  There  is  no  alternative. 

Enforced  economy.  It  will  not  always  be  necessary,  however, 
for  the  government  by  authority  directly  to  forbid  us  to  con- 
sume these  things.  This  enforced  economy  will  come  about 
in  other  ways.  The  government  must  have  money  with  which 
to  pay  its  soldiers  and  sailors  and  to  buy  its  munitions  and 
supplies.  We  citizens  of  the  Republic  shall  be  called  upon  to 
supply  the  government  with  this  money.  The  money  will 
be  taken  either  in  the  form  of  taxation  or  in  the  form  of 
voluntary  loans.  . 

This,  in  short,  is  exactly  what  we  are  called  upon  to  do  by 
any  system  of  war  finance,  whether  it  be  the  slacker's  system 
or  the  patriot's  system.  Under  the  slacker's  system  it  is  pro- 
posed that  we  shall  not  make  a  strenuous  effort  to  pay  a  large 
proportion  of  the  war's  expenses  as  we  go  along,  but  that  the 
government  shall  borrow  the  money  in  order  to  avoid  dis- 
turbing us  who  stay  at  home,  and  in  order  that  the  young 
fellows  who  go  to  the  front  may  help  pay  for  the  war  after 
they  return  home  —  if  they  do  return  home.  The  patriot's 
system  is  the  proposal  that  we  make  strenuous  efforts  to  pay 
as  large  a  proportion  as  possible  of  the  war's  expenses  as  we 
go  along,  in  order  that  we  who  stay  at  home  may  bear  at  least 


THE  FINANCING  OF  A  WAR  523 

a  reasonable  fraction  of  the  burden  which  will  be  borne  by 
those  who  go  to  the  front,  and  not  ask  those  who  return  home, 
having  borne  the  real  burden  of  the  war,  then  to  help  pay 
back  to  us  the  money  which  we  loaned  to  the  government. 

Characteristic  fallacies.  It  is  necessary,  however,  to  clear 
away  certain  confusions  which  arise.  The  sources  of  this  con- 
fusion are  mainly  embodied  in  the  following  statements:  (i) 
Excessive  taxation  upon  consumption  will  cause  popular  re- 
sentment. (2)  Excessive  taxes  on  industry  will  disarrange  busi- 
ness, dampen  enthusiasm,  and  restrict  the  spirit  of  enterprise 
at  the  very  time  when  the  opposite  is  needed.  (3)  Exces- 
sive taxes  on  incomes  will  deplete  the  surplus  available  for 
investments  and  interfere  with  the  placing  of  the  enormous 
loans  which  will  be  necessary  in  any  event.  (4)  Excessive 
taxes  on  wealth  will  cause  a  serious  diminution  of  the  incomes 
which  are  at  present  largely  drawn  upon  for  the  support  of 
educational  and  philanthropic  enterprises.  (5)  Excessive  taxa- 
tion at  the  outset  of  the  war  will  reduce  the  elasticity  available 
for  the  increasing  demands  that  are  soon  to  come. 

As  to  the  first  of  these  objections,  it  is  political  rather  than 
economic.  Such  a  tax  as  is  proposed  will  cause  popular  resent- 
ment only  on  condition  that  the  people  are  crudely  ignorant 
or  unpatriotic,  —  that  they  are  ignorant  enough  to  imagine  that 
the  expenses  of  the  war  can  be  paid  out  of  nothing  or  unpa- 
triotic enough  to  be  unwilling  to  bear  the  necessary  burdens 
of  the  war.  Even  though  it  should  cause  popular  resentment, 
it  would  not  affect  in  one  way  or  another  the  economic  wisdom 
of  such  a  policy.  It  is  one  thing  to  say  that  a  policy  is 
economically  sound  ;  it  is  quite  a  different  thing  to  say  that 
the  people  know  enough  about  economics  to  understand  its 
soundness.  An  autocrat  who  was  trying  to  determine  just  how 
much  his  people  would  stand  might  well  consider  this  ques- 
tion. In  a  democracy,  however,  the  people  need  not  stop  to  ask 
themselves  how  much  they  themselves  will  stand,  or  whether 
their  own  voluntary  acts  would  cause  resentment  in  themselves. 


524          PRINCIPLES  OF  POLITICAL  ECONOMY 

As  to  the  second  proposition,  it  is  only  necessary  to  point 
out  that  a  great  war,  absorbing  several  millions  of  men  of  pro- 
ductive age  either  in  the  actual  fighting  or  in  the  production 
of  supplies  for  those  who  do  the  fighting,  cannot  possibly  be 
carried  on  without  a  good  deal  of  disarrangement  of  business. 
Moreover,  there  will  be  the  same  disarrangement  of  business 
whether  we  turn  our  money  over  to  the  government  voluntarily, 
and  thus  voluntarily  cut  down  our  ability  to  purchase  supplies 
for  private  consumption,  or  whether  we  turn  the  same  amount 
of  money  over  to  the  government  in  the  form  of  taxes.  As 
to  the  suggestion  that  heavy  taxes  will  dampen  enthusiasm  and 
restrict  the  spirit  of  enterprise,  that  is  a  question  of  national 
psychology.  It  is  hardly  probable  that  citizens  will  restrict 
enterprise  and  have  their  enthusiasm  dampened  by  taxes  the 
reason  for  which  they  understand  and  approve.  In  fact, 
reasonably  heavy  taxes,  for  a  purpose  which  they  understand 
and  approve,  will  probably  spur  them  on  to  greater  effort  and 
enterprise,  —  will  cause  them  to  work  longer  hours  and  take 
shorter  vacations  in  order  to  be  able  to  pay  them. 

The  third  proposition  is  absurd.  The  money  which  is  raised 
by  taxation  will  not  have  to  be  raised  by  loans.  The  only 
possible  way  in  which  heavy  taxes  can  interfere  with  the  plac- 
ing of  enormous  loans  is  by  making  the  enormous  loans 
unnecessary.  Even  with  the  proposed  tax,  loans  will  be  neces- 
sary, but  the  less  there  is  raised  by  taxation,  obviously  the 
more  there  must  be  raised  by  loans. 

The  fourth  proposition  has  some  merit,  but  it  may  well  be 
asked  whether,  in  a  time  of  great  national  crisis,  even  phil- 
anthropic work  which  is  not  connected  with  the  war  should 
not  be  somewhat  curtailed.  A  great  deal  depends  upon  how 
desperate  the  crisis  is.  All  needless  luxuries  and  every  form 
of  consumption  except  those  which  are  indispensable  should 
of  course  be  cut  off  first.  If  this  is  done,  most  of  the 
philanthropic  work  can  still  be  carried  on. 

The  fifth  proposition  can  mean  nothing  more  than  that  if  we 


THE  FINANCING  OF  A  WAR  525 

tax  ourselves  to  the  limit  at  the  start,  we  cannot  later  on  increase 
taxes  by  as  large  a  percentage  as  we  could  if  we  taxed  ourselves 
lightly  at  the  start.  True  enough  ;  but  it  would  not  be  necessary. 

One  of  the  nai've  objections  to  the  policy  of  paying  a  large 
proportion  of  the  expenses  of  the  war  by  taxes  is  that  when 
expenditures  approach  the  gigantic  sums  of  present-day  war- 
fare such  a  tax  policy  would  require  more  than  the  total  sur- 
plus of  social  income.  If  by  social  income  is  meant  money 
income,  it  will  apply  to  loans  as  well  as  to  taxes.  The  people 
cannot  turn  over  to  Ihe  government,  either  by  loans  or  by  taxes, 
more  money  than  they  have  or  can  lay  their  hands  upon. 
They  have  just  as  much  money  to  pay  to  the  government  in 
the  form  of  taxes  as  they  have  in  the  form  of  loans.  The 
possibilities  are  exactly  equal  in  either  case.  It  is  only  a  ques- 
tion as  to  which  is  the  better  policy  or  the  better  method  of 
getting  that  money  into  the  government  treasury. 

If,  however,  by  social  income  is  meant  the  products  of  indus- 
try and  enterprise,  the  proposition  becomes  an  absurdity.  No 
nation  can  put  into  a  war  more  than  its  total  surplus  social 
income ;  that  is,  more  than  it  can  produce  over  and  above  what 
is  necessary  to  maintain  the  life  of  the  people.  That  would  be 
like  saying  that  it  is  necessary  for  a  country  to  put  into  the  war 
more  than  its  total  man  power. 

The  real  cost  of  the  war  cannot  be  postponed.  Another 
basic  and  indisputable  fact  which  we  should  bear  in  mind  is 
that  the  expenses  of  the  war,  measured  in  productive  power 
and  goods,  or  measured  as  all  costs  must  ultimately  be  meas- 
ured, namely,  in  energy  expended,  will  actually  be  paid  as  we 
go  along,  whatever  our  financial  policy.  Soldiers  cannot  use 
guns  and  ammunition,  nor  consume  rations,  which  are  to  be 
produced  in  the  future.  Everything  that  is  actually  used  in 
the  war  will  be  produced  before  it  is  used  ;  the  cost,  in  terms 
of  energy,  will  have  been  paid.  In  terms  of  real  income,  as  dis- 
tinct from  money  income,  the  war  will  actually  be  supported  by 
current  income ;  that  is,  out  of  the  products  of  current  industry. 


526          PRINCIPLES  OF  POLITICAL  ECONOMY 

The  only  question  before  us  is,  Where  and  how  will  the  gov- 
ernment get  the  money  with  which  to  pay  for  these  things  ? 
It  can  raise  it  largely  by  taxation  or  largely  by  loans ;  in  any 
case  it  will  have  to  use  a  combination  of  both  methods.  The 
patriotic  theory  is  that  it  should  raise  as  much  as  possible  by 
taxation  and  borrow  only  as  a  supplementary  measure.  It  would 
take  some  time  to  get  the  taxing  machinery  in  operation,  and 
the  money  which  it  puts  into  the  treasury  would  come  in 
gradually.  At  the  beginning  of  a  war  a  large  sum  must  be 
had  at  once.  The  only  possible  way  to  raise  that  initial  sum 
is  by  borrowing.  The  slacker's  theory  is  that  the  war  should 
be  financed  as  far  as  possible  by  loans,  —  that  taxes  should  be 
increased  only  in  order  to  pay  the  necessary  interest  on  these 
loans  and  such  other  necessary  expenses  as  it  seems  expedient 
to  pay  out  of  the  proceeds  of  the  loans. 

Therefore  the  real  question,  stripped  of  all  verbiage,  is  simply 
this,  Shall  those  who  stay  at  home  pay  for  a  war  as  far  as  pos- 
sible as  they  go  along,  or  shall  they  ask  the  government  to 
borrow  the  money  in  order  that  they  may  not  be  too  much  dis- 
turbed or  disarranged,  and  that  the  others  who  go  to  the  front 
and  do  the  fighting  may  help  to  pay  for  it  after  they  return 
home  —  if  they  do  return  home  ? 

Keeping  money  in  circulation.  It  seems  to  be  assumed,  on 
the  other  hand,  that  money  possesses  some  inherent  power  of 
production  instead  of  being  simply  a  medium  of  exchange. 

There  is  a  story  of  a  little  girl  who  decided  to  spend  her 
missionary  money  for  ice  cream  in  order  that  the  ice-cream 
man  might  have  money  to  give  to  the  missionary  cause.  There 
are  men  who  try  to  persuade  us  that  we  must  do  the  same  thing 
in  order  to  raise  money  for  a  war.  They  tell  us  that  unless  we 
continue  spending  our  money  freely  for  unnecessary  things, 
the  sellers  of  these  unnecessary  things  will  not  be  able  to  buy 
liberty  bonds  or  to  pay  war  taxes.  We  are  told  by  others  that 
money  must  be  kept  in  circulation  ;  otherwise  our  prosperity  will 
be  destroyed,  and  without  prosperity  we  cannot  finance  a  war. 


THE  FINANCING  OF  A  WAR  527 

Both  these  arguments  attribute  to  money  a  productive  power 
which  it  does  not  possess.-  To  spend  money  for  unnecessary 
things  is  to  hire  men  to  produce  them.  As  fast  as  these  men 
can  be  used  in  the  industries  made  necessary  by  a  war  they 
are  needed  there.  To  keep  them  in  the  unnecessary  industries 
is  to  interfere  with  the  expansion  of  the  necessary  industries. 
Therefore  it  is  pretty  clear  that  during  the  continuance  of  a  war, 
while  men  are  badly  needed  in  the  necessary  industries,  it  will 
be  uneconomical  and  even  criminal  for  private  individuals  to 
continue  to  spend  money  for  unnecessary  things. 

But,  granting  that  it  is  important  to  keep  money  circulating, 
something  depends  upon  the  channels  in  which  it  circulates. 
The  dollar  which  I  spend  for  an  unnecessary  thing  circulates, 
it  is  true ;  but  it  is  equally  true  that  it  circulates  if  I  give  it  to 
the  government,  the  Red  Cross,  or  some  other  agency  directly 
connected  with  the  war,  to  be  spent  for  some  necessary  thing. 
So  far  as  mere  circulation  is  concerned  there  is  no  appreciable 
difference  between  the  two  cases.  But  something  else  is  in- 
volved besides  mere  circulation.  The  productive  power  which 
produces  the  unnecessary  thing  is  not  so  well  employed,  from 
the  standpoint  of  national  economy,  as  the  productive  power 
which  produces  the  necessary  thing; 

Granting  also  that  it  is  important  to  give  employment  to  men, 
something  depends  upon  what  they  are  employed  to  do.  To 
spend  a  dollar  on  an  unnecessary  thing  does,  it  is  true,  give 
employment  to  labor ;  but  it  is  equally  true  that  the  same 
dollar  spent  for  a  necessary  thing  would  employ  the  same 
amount  of  labor.  The  only  question  is  whether  it  is  better 
to  have  the  labor  employed  in  producing  necessary  things  or 
unnecessary  things. 

If  "  Business  as  usual  "  merely  means  that  we  should  go  on 
doing  precisely  the  same  things  in  time  of  war  as  in  time  of 
peace,  it  is  a  palpable  absurdity.  If  it  means  that  everybody  is 
to  keep  as  busy  as  ever,  or  much  busier  than  ever,  it  is  good 
advice  so  far  as  it  goes.  What  we  really  need  'to  consider  is, 


528          PRINCIPLES  OF  POLITICAL  ECONOMY 

What  shall  we  keep  ourselves  and  others  busy  doing  ?  Shall  we 
keep  ourselves  and  them  busy  producing  unnecessary  things, 
or  shall  we  do  what  we  can  to  keep  ourselves  and  them  busy 
doing  the  necessary  things  ?  Obviously  the  latter.  "  Busier 
than  ever  "  is  a  much  better  motto  than  "  Business  as  usual." 

The  only  way  we  can  possibly  keep  everybody  doing  the 
necessary  things  in  war  time  is,  first,  to  do  something  ourselves 
which  is  necessary,  and,  second,  to  spend  all  our  money  for 
necessary  things.  If  we  have  more  money  to  spend  than  is 
sufficient  to  purchase  necessary  things  for  our  own  consump- 
tion, we  can  either  spend  the  surplus  for  tools  of  production 
in  some  necessary  industry  (that  is,  we  can  invest  it)  or  we 
can  turn  it  over  to  the  government,  the  Red  Cross,  or  some 
other  public  agency.  This  agency  can  then  spend  it  for  much- 
needed  things. 

By  all  means,  therefore,  let  us  keep  money  circulating  in 
war  time,  not  that  this  in  itself  means  much,  but  because  it 
gives  direction  to  the  real  productive  energy  of  the  country. 
But  let  us  see  to  it  that  every  dollar  which  we  put  into  circu- 
lation is  put  where  it  will  do  the  most  good,  —  where  it  will 
direct  the  productive  energy  of  the  country  into  the  necessary 
rather  than  into  the  unnecessary  industries. 


PART  SEVEN 

REFORM 


Which  has  to  do  with  various  plans  for  the  reorganization  of 
industrial  society 


S29 


CHAPTER  XLV 

COMMUNISM 

Compulsion  versus  freedom.  The  schemes  for  the  improve- 
ment of  social  conditions  fall  into  two  general  classes  :  first, 
those  which  rely  upon  the  compulsory  power  either  of  a  benevo- 
lent despot  or  of  the  mass  over  the  individual ;  and,  second, 
those  which  rely  upon  voluntary  work  by  individuals  under  the 
principle  of  free  contract.  Among  those  which  rely  upon  the 
authority  of  the  mass  or  group  over  the  individual,  commu- 
nism is  the  most  extreme.  It  is  sometimes  called  cooperation, 
but  it  is  compulsory  cooperation  as  distinguished  from  volun- 
tary cooperation.  The  compulsion  is  made  complete  by  the 
fact  that  the  community,  or  the  group,  owns  all  the  property 
and  the  individual  owns  none.  All  the  processes  of  production 
and  distribution  are  carried  on  by  the  community  as  a  whole 
rather  than  by  individual  initiative  and  voluntary  agreements 
among  individuals. 

Meaning  of  communism.  Communism  may  therefore  be 
defined  as  a  type  of  social  organization  in  which  all  wealth,  in- 
cluding both  producers'  goods  and  consumers'  goods,  is  owned 
and  controlled  by  the  community.  It  differs  from  socialism  in 
that  the  latter  proposes  that  the  community  shall  own  and 
operate  only  producers'  goods,  leaving  the  consumers'  goods  to 
be  owned  and  enjoyed  by  individuals.  A  completely  commu- 
nistic society,  for  example,  would  own  the  dwelling  houses  and 
even  the  food  and  clothing,  but  would  distribute  these  to  the 
individual  members  very  much  as  they  are  now  distributed 
within  the  small  group  which  we  call  the  family.  From  a  cer- 
tain point  of  view  we  might  say  that  the  ideal  family  of  to-day 
is  a  small  communistic  group  in  which  all  property  is  held  in 


532          PRINCIPLES  OF  POLITICAL  ECONOMY 

common  and  enjoyed  in  common  rather  than  separately  by  the 
individual  members  of  the  family. 

Relation  to  anarchism.  Theoretically,  communism  would  be 
at  the  opposite  end  of  the  scale  from  anarchism,  which  is  an 
absence  of  all  government,  — at  least  the  absence  of  all  compul- 
sory government.  In  actual  fact,  however,  it  is  not  always  easy 
to  distinguish  between  a  communist  and  an  anarchist.  As  a 
matter  of  fact,  there  is  a  considerable  group  of  individuals 
who  call  themselves  communist-anarchists ;  that  is,  they  are 
opposed  to  any  kind  of  government  which  resembles  those  with 
which  we  are  now  acquainted.  They  would  substitute  small 
communistic  groups,  each  one  working  more  or  less  independ- 
ently of  the  others,  and  make  such  voluntary  arrangements 
for  exchange  of  products  as  they  might  find  to  their  mutual 
advantage.  In  so  far  as  they  would  oppose  all  compulsion, 
they  would  be  called  anarchists ;  in  so  far  as  they  would  have 
all  wealth  owned  in  common,  at  least  within  small  groups,  they 
would  be  called  communists.  Unless,  however,  the  small 
group  could  exercise  some  compulsory  control  over  the  prop- 
erty of  the  group,  it  would  be  anarchism  rather  than  commu- 
nism. If  the  group  did  exercise  orderly  control  over  its  own 
property  to  the  exclusion  of  individuals  and  of  rival  groups, 
it  would  be  compelled  to  exercise  compulsion  and  would 
therefore,  to  that  extent,  cease  to  be  anarchistic  and  become 
purely  communistic. 

Utopias.  Naturally  enough,  communism  has  never  been  tried 
on  a  large  scale.  It  has  been  advocated  by  many  philosophers, 
both  ancient  and  modern.  Many  pictures  have  been  drawn 
of  ideal  societies  in  which  communism  was  the  outstanding 
feature.  Plato,  in  his  "  Republic,"  pictured  such  an  ideal  com- 
monwealth ;  not  only  was  all  wealth  to  be  held  in  common, 
but  wives  and  children  likewise.  Defective  children,  or  chil- 
dren who  seemed  likely  to  be  a  burden  rather  than  a  help  to 
the  State,  were  to  be  disposed  of  in  early  infancy.  Sir  Thomas 
More,  in  his  "  Utopia,"  presented  another  picture  of  an  ideal 


COMMUNISM  533 

society  based  upon  communism.  In  order  to  give  an  impres- 
sion of  reality  he  pictured  some  travelers  in  South  America 
who  had  discovered  a  new  country,  in  which  communism  pre- 
vailed. Francis  Bacon  gave  us  a  somewhat  fragmentary  picture 
of  his  ideal  of  society  in  his  "  New  Atlantis."  Tommaso 
Campanella,  in  "The  City  of  the  Sun,"  and  various  other 
writers,  have  kept  alive  the  ideal  of  a  communistic  society. 
In  more  recent  times  .we  have  such  books  as  "  News  from 
Nowhere,"  by  William  Morris,  "The  Cooperative  Common- 
wealth in  its  Outlines,"  by  Laurence  Gronlund,  and  "  Looking 
Backward,"  by  Edward  Bellamy.  This  is  a  list  of  distinguished 
writers,  and  their  books  make  attractive  reading.  They  show 
pretty  clearly  how  persistently  the  world  has  dreamed  of  social 
conditions  in  which  there  should  be  no  rivalry  of  interests, 
no  quarreling  and  bickerings  over  questions  of  property,  —  of 
mine  and  thine. 

It  is  not  very  difficult  to  show  where  these  pictures  are 
defective  and  how  impractical  such  schemes  of  social  organiza- 
tion are.  The  world  at  large,  or  at  least  a  great  majority  of  the 
people  of  the  world,  has  put  very  little  confidence  in  these  pro- 
posals ;  but  probably  no  generation  has  been  without  a  certain 
number  of  spirits  who  have  retained  their  belief  in  those  peculiar 
ideals  of  justice  and  economy  which  these  Utopian  works  have 
set  forth. 

Experiments.  The  primitive  Christians.  Nor  have  actual 
experiments  been  wanting.  The  primitive  Christian  Church  is 
frequently  referred  to  as  an  example  of  communism.  One  or 
two  passages  in  The  Acts  of  the  Apostles  indicate  that  the 
first  Christians,  at  least,  maintained  a  communistic  fund  for 
the  maintenance  of  impecunious  members.  For  a  short  time 
they  appear  to  have  put  practically  all  of  their  possessions  into 
a  common  fund.  It  will  also  be  noticed  that  they  not  only 
put  their  possessions  into  a  common  fund,  but  they  stopped 
working  and  remained  together  in  one  place,  awaiting  the 
second  coming  of  the  Lord.  This  makes  it  appear  as  though 


534          PRINCIPLES  OF  POLITICAL  ECONOMY 

communism  were  not  with  them  an  ideal  scheme  of  social  or- 
ganization but  merely  a  convenient  arrangement  by  means  of 
which  they  could  live  while  preparing  for  the  end  of  the  world 
and  their  sudden  translation  to  heaven. 

The  Spartans.  The  Spartan  commonwealth  is  likewise  re- 
ferred to  frequently  as  a  communistic  society.  According  to 
the  account  given  in  Plutarch's  "  Life  of  Lycurgus,"  there 
were  many  communistic  features  about  the  life  of  the  Spartans. 
It  appears  to  have  been  the  communism  of  a  military  camp, 
however,  for  the  Spartans  themselves  were  only  a  small  clan, 
or  caste,  ruling  over  a  much  larger  population  of  subject  people. 
In  order  that  they  might  be  strong  in  a  military  sense,  and 
hold  the  masses  of  the  people  in  subjection,  they  organized 
themselves  very  much  as  a  military  camp  has  always  been 
organized.  There  was  no  communism  whatever  for  the  mass 
of  the  people.  It  extended  only  to  the  small  aristocratic  and 
ruling  class  called  Spartans. 

The  monasteries.  Most  of  the  monasteries  of  the  Middle 
Ages  were  organized  on  a  communistic  basis.  They  also  prac- 
ticed celibacy,  showing  that  they  did  not  regard  communism 
as  the  ideal  basis  of  a  continuing  human  society.  The  whole 
monastic  life  was  organized  for  the  purpose  of  promoting 
spirituality  rather  than  for  the  purpose  of  reforming  human 
society. 

The  Taborites.  Certain  extreme  sects  among  the  early 
Protestants  attempted  some  kind  of  communistic  life  without 
celibacy,  but  never  made  much  of  a  success.  Conspicuous 
among  these  were  the  Taborites,  an  extreme  faction  of  the 
followers  of  John  Huss,  the  Bohemian  reformer.  They  with- 
drew from  the  city  of  Prague  and  started  a  community  on  a 
hill  to  which  they  gave  the  name  Mount  Tabor.  They  hence 
became  known  as  the  Taborites.  So  long  as  they  were  thor- 
oughly united  by  their  religious  sentiments  they  worked  very 
successfully,  not  only  in  productive  industry  but  even  in  war, 
for  the  great  Austrian  Empire  sent  army  after  army  against 


COMMUNISM  535 

them.  They  defeated  the  imperial  armies  because  of  the 
superiority  of  their  organization.  But  eventually  dissensions 
arose  among  them ;  they  were  divided  and  overthrown,  and 
their  community  was  broken  up. 

American  experiments.  America  has  been  a  fruitful  field 
for  the  trying  out  of  all  sorts  of  experiments.  Many  of  the  first 
colonists  came  here  because  they  were  inspired  by  religious 
sentiments.  They  founded  colonies  where  their  religious  ideas 
could  flourish.  This  continent  presented  a  virgin  field  where 
people  with  peculiar  ideals  of  religious  organization  or  of 
social  economy  could  come  and  put  their  ideals  to  the  test. 

The  outline  on  the  following  page  gives  a  rough  classifica- 
tion of  the  more  important  of  these  experiments.  There  were 
many  not  included  in  this  list,  which  were  either  unimportant 
as  to  numbers  or  so  short-lived  as  to  make  them  unworthy 
of  mention.  It  will  be  noticed  that  the  long-lived  communi- 
ties were  all  religious  in  their  nature.  Of  the  nonreligious 
communities  only  one,  namely,  the  Icarians,  lasted  a  single 
generation,  whereas  several  of  the  religious  communities  have 
lasted  half  a  century,  and  one  group  of  communities,  namely, 
the  Shakers,  has  several  colonies  that  have  survived  for  more 
than  a  century. 

Religious  communities.  Most  of  the  religious  communities, 
it  will  be  noticed,  are  of  foreign  origin,  and  most  of  these  are 
of  German  origin.  The  Shakers  are  placed  among  those  of 
American  origin.  As  a  religious  sect  the  Shakers  originated 
in  England,  but  they  made  their  experiments  in  communism 
in  this  country.  They  have  established  numerous  colonies  from 
Maine  to  Kentucky.  They  are  celibates,  and  therefore  could 
have  no  continuing  existence  unless  they  continued  to  make 
converts.  This  they  have  failed  to  do  in  recent  years,  and 
consequently  the  Shaker  communities  are  dying  out  as  the 
old  people  drop  away. 

The  Perfectionists  originated  in  Vermont  under  the  leader- 
ship of  Mr.  John  Humphrey  Noyes.  They  afterwards  moved 


AMERICAN 
COMMU- 
NISTIC 
SOCIETIES1 


Religious 


Of  Ameri- 
can origin 


The  Shakers  (numerous  colonies),  Maine 

to  Kentucky,  1787 
The    Perfectionists    of   Oneida,   N.  Y., 

1848-1879 

Zion  City,  111.,  1890-96 
Jemima    Wilkinson's    New    Jerusalem, 

N.Y.,  1786-1820 
Celesta,  Pa.,  1852-1864 
Salem-on-Erie,  N.  Y.,  1867- 
The   Woman's   Commonwealth,    Texas 

and  Washington,  D.  C.,  1880- 
The  Lord's  Farm,  N.J.,  1877 
Shalam,  or  the  Children's  Land,  N.  M., 

1884-1901 
Estero,  Fla.,  1904- 

The  Christian  Commonwealth,  Ga.,  1896- 
The  House  of  David,  Mich.  (?) 

Ephrata,  Pa.,  1732- 
The  Harmonists,  Pa.,  1803- 
The  Separatists  of  Zoar,  Ohio,  1819-1898 
The  Amana  Society,  Iowa,  1843- 
Of  foreign     The  Bishop  Hill  Colony,  111.,  1846-1862 
origin     1  The  Bruederhof  Communities,  S.  Dak., 

1862- 
The    Waldensian    Colonies,   N.  C.  and 

Texas,  1893- 
St.  Nazianz  Colony,  Wis.,  1854 

(New  Harmony,  Ind.,  1825-1827 
'Owenistic  -|  Yellow  Springs,  Ohio,  1824 
[Numerous  others 

Brook  Farm,  Mass.,  1841-1847 
Fruitlands,  Mass.,  1843 
Hopedale,  Mass.,  1841-1858 

Fourieris-  J  North  American  Phalanx,  N.J.,  1843-1856 
tic          |  Wisconsin  Phalanx,  Wis.,  1844-1850 

Northampton  Association,  Mass.,  1842- 

1846 
^Numerous  others 

T,  (Nauvoo,  111.,  1849-1866 

Icarians   1  Cheltenham,  Mo.,  1858-1864 
'    [Icaria,  Iowa,  1860-1895 

Skaneateles  Community.N.Y.,  1844-1 846 
Polish  Colony,  Anaheim,  Cal.,  1876-1878 
Topolobampo,  Mexico,  1886-1901 
The  Ruskin  Commonwealth,  Ga.,  1896- 
Inde-      J       1901 
pendent   1  The  Cooperative   Brotherhood,  Wash., 

1898- 

Equality  Colony,  Wash.,  1897- 
The  Straight  Edgers,  N.  Y.,  1899- 
[The  Helicon  Home,  1906-1907 

1  This  outline  is  based  on  "American   Communities,"  by  W.  A.  Hinds 
(Chicago,  1908). 

336 


Non- 
religious 


COMMUNISM  537 

to  Oneida,  New  York.  They  have  given  up  communism  and 
have  organized  themselves  in  the  form  of  a  joint-stock  society 
and  are  still  prosperous  and  doing  a  thriving  business. 

A  multitude  of  other  experiments  of  a  more  or  less  religious 
nature  have  been  carried  out  by  faith  healers,  adventists,  and 
other  people  of  rather  extreme  religious  views. 

Of  the  religious  communities  of  foreign  origin,  that  at 
Ephrata,  Pennsylvania,  was  the  first  to  be  organized  on  a  dur- 
able basis  in  this  country.  Like  the  Shakers,  they  were  celi- 
bates and  were  therefore  doomed  to  ultimate  extinction. 

One  of  the  most  successful  of  all  these  experiments  was 
started  in  western  Pennsylvania  by  some  German  pietists 
among  the  followers  of  one  Georg  Rapp,  from  whom  they 
were  given  the  name  of  Rappists.  They  afterwards  moved  to 
Indiana,  where  they  sojourned  for  a  time  at  New  Harmony 
in  the  southwestern  corner  of  the  state.  After  a  few  years 
they  sold  out  and  moved  back  to  Pennsylvania.  Their  colony, 
known  as  Economy,  was  a  place  for  sightseers  for  many  years. 

The  Separatists  of  Zoar  and  the  Amana  Society  were  some- 
what similar  in  their  origin  and  in  their  subsequent  history. 
They  did  not  practice  celibacy.  They  prospered  amazingly  and 
presented  a  very  attractive  life  as  seen  by  visitors  from  the 
outside.  They  were  animated  by  intense  religious  enthusiasm, 
and  devotion  to  their  own  leaders.  The  Separatists  of  Zoar, 
however,  gave  up  communism  in  1898,  largely  because  the 
younger  generation  had  lost  something  of  the  religious  zeal  of 
the  older  generations,  and  decided  that  they  preferred  the  indi- 
vidualistic type  of  life  to  the  communistic.  The  Amana  Society 
is  still  flourishing,  and  the  people  are  apparently  satisfied. 

The  Bishop  Hill  Colony  in  Illinois  was  a  Swedish  colony ; 
its  character  and  organization  resembled  most  of  the  others. 
When  they  lost  their  intense  religious  zeal,  they  likewise  lost 
their  enthusiasm  for  the  communistic  type  of  life  and  gave  it  up. 

A  series  of  communistic  societies  is  still  flourishing  in  South 
Dakota.  They  are  known  as  the  Brotherhood  Societies. 


538          PRINCIPLES  OF  POLITICAL  ECONOMY 

Several  communities  of  North  Italian  Protestants  have 
flourished  in  the  South,  particularly  in  Valdese,  North  Carolina, 
and  near  Gainesville,  Texas. 

Nonreligious  communities.  In  1822  Robert  Owen,  a  great 
English  philanthropist  and  a  firm  believer  in  what  was  then 
called  socialism,  came  to  America  for  the  purpose  of  establish- 
ing an  ideal  community.  He  delivered  many  addresses  and 
created  much  enthusiasm.  In  looking  about  for  a  location  he 
found  that  the  Harmonists,  who  were  then  living  in  New 
Harmony,  Indiana,  were  desirous  of  selling  out  and  moving 
back  to  Pennsylvania.  He  bought  all  their  real  estate  and  pro- 
ceeded to  establish  a  colony  of  his  own.  He  was  a  man  of 
great  ability,  who  had  made  a  fortune  of  his  own,  which  he 
devoted  liberally  to  the  propagation  of  his  ideas.  His  colony, 
however,  was  made  up  of  idealists  who  were  more  in  the  habit 
of  talking  about  their  theories  of  society  than  of  working 
to  produce  wealth ;  it  was  a  good  illustration  of  the  inability 
of  any  community  to  live  on  talk.  It  lasted  a  little  over  two 
years.  Numerous  other  experiments  of  the  same  kind  were 
tried,  none  of  which  lasted  for  a  single  year.  One  at  Yellow 
Springs,  Ohio,  lasted  for  several  months. 

About  1841  the  works  of  a  French  communist,  Fourier, 
were  translated  and  published  in  this  country.  They  created 
great  enthusiasm,  and  a  large  number  of  experiments  were 
made.  The  most  notable  of  these  was  Brook  Farm,  Massachu- 
setts, which  was  started  independently  but  afterward  adopted  the 
plan  of  Fourier.  This  experiment  was  notable  mainly  because 
of  the  great  names  in  its  list  of  members.  Some  of  the  most 
distinguished  men  and  women  of  that  day,  in  letters  and  in 
scholarship,  joined  the  Brook  Farm  community.  The  most 
successful  of  the  Fourier  experiments,  however,  was  the  North 
American  Phalanx  in  New  Jersey.  It  lasted  for  thirteen  years. 
An  experiment  at  Hopedale,  Massachusetts,  was  only  partially 
communistic  ;  it  lasted  seventeen  years  and  then  became  a 
joint-stock  association. 


COMMUNISM  539 

As  indicated  above,  the  most  successful  of  all  the  nonreli- 
gious  communities  in  this  country  was  the  Icarian  community 
in  Iowa.  They  were  followers  of  Etienne  Cabet,  a  French 
communist,  who  wrote  a  very  attractive  book  entitled  "  A 
Voyage  in  Icaria."  It  awoke  the  slumbering  idealism  of  many 
French  people  who  desired  to  form  a  commonwealth  after  the 
description  of  the  life  of  the  Icarians.  Cabet  led  his  followers 
to  this  country  and  landed  in  New  Orleans,  hoping  to  estab- 
lish them  in  northeastern  Texas.  The  land  proved  to  be  in- 
accessible and  the  climate  not  very  agreeable.  They  returned 
to  New  Orleans  discouraged,  but  learned  that  the  Mormons 
had  recently  been  driven  out  of  Nauvoo,  Illinois.  They  pro- 
ceeded by  boat  to  Nauvoo  and  established  themselves,  finding 
plenty  of  vacant  houses  and  factory  buildings.  Here  they 
prospered  for  a  number  of  years,  but  they  wished  to  find  a  situ- 
ation where  they  could  be  more  to  themselves,  and  a  tract  of 
land  was  bought  in  southwestern  Iowa,  not  very  far  from  the 
present  town  of  Corning.  There  they  lived  under  the  com- 
munistic system  until  1895,  when  they  gave  up  communism 
and  came  over  to  an  individualistic  regime. 

A  large  number  of  other  societies  have  been  established, 
by  the  followers  both  of  Robert  Owen  and  of  Fourier,  and 
in  recent  years  by  the  admirers  of  Laurence  Gronlund  and 
Edward  Bellamy. 

Results.  It  may  seem  as  though  the  experiences  of  these 
numerous  communistic  societies  tended  to  throw  discredit  upon 
all  communistic  ideals.  The  advocates  of  communism,  how- 
ever, insist  that  the  principles  of  communism  are  still  sound, 
even  though  a  thousand  communities  fail.  To  an  impartial 
observer  it  looks  as  though  communism  might  work  very  well 
if  people  were  built  on  a  communistic  plan.  If  they  have  a 
passion  for  communism,  or  a  powerful  religious  emotion  which 
will  overcome  their  individualistic  and  particularistic  tendencies, 
they  may  live  together  peaceably  under  communism.  Unless 
they  are  inspired  with  religious  zeal  or  a  genuine  passion  for 


540          PRINCIPLES  OF  POLITICAL  ECONOMY 

communism,  it  seems  as  though  the  natural  individuality,  not 
to  say  the  contrariness,  of  human  nature  would  continue  to 
break  up  all  communistic  societies  in  the  future  as  it  has  in 
the  past. 

But  why,  it  may  be  asked,  will  not  communism  work  in  a 
large  national  group  as  it  now  works  in  a  small  family  group  ? 
It  does  not  seem  to  work  particularly  well  in  some  families. 
In  those  few  abnormal  cases  where  the  members  of  the  family 
have  no  particular  affection  for  one  another,  the  question  of 
the  division  of  the  family  funds  is  a  difficult  one.  If  the  father 
is  selfish  and  cares  nothing  for  the  others,  he  becomes  an 
autocrat  and  spends  all  or  the  greater  part  of  his  income 
upon  himself.  If  the  others  feel  the  same  way  toward  him 
and  one  another,  they  quarrel  among  themselves.  But  in  a 
normal  case,  where  an  intense  affection  for  one  another  pre- 
vails, there  is  no  quarreling  and  everything  is  shared  in 
common. 

If  it  were  possible  for  the  members  of  a  large  national 
group  to  feel  toward  one  another  as  the  members  of  a  normal 
family  feel,  communism  or  almost  any  other  system  might 
work  well.  But  the  average  man's  capacity  for  affection  is 
limited.  It  would  take  one  with  a  genius  for  friendship  to 
feel  a  warm  affection  for  even  a  hundred  separate  individuals, 
to  say  nothing  of  a  hundred  million.  It  would  be  practically 
impossible  for  any  of  us  to  feel  toward  each  and  every  one  of 
a  hundred  million  people,  only  a  few  of  whom  we  had  ever 
seen,  precisely  as  we  do  toward  our  own  brothers  and  sisters, 
fathers  and  mothers,  and  other  very  near  relatives.  This  is 
sufficient  reason  why  communism  cannot  be  made  to  work  well. 


CHAPTER  XLVI 

SOCIALISM 

Socialism  and  communism  have  shifted  meanings.  The  term 
socialism  has  a  variety  of  meanings,  though  there  are  certain 
elements  common  to  every  definition.  During  the  last  seventy- 
five  years  the  meanings  attached  to  socialism  and  communism 
have  been  shifted.  That  which  is  now  known  as  socialism 
was  formerly  known  as  communism.  Karl  Marx,  who  is  re- 
garded as  the  great  apostle  of  modern  socialism,  called  himself 
a  communist.  On  the  other  hand,  socialism  was  applied  to 
general  schemes  for  social  amelioration  which  did  not  involve 
any  fundamental  change  in  the  organization  of  society.  Com- 
munism, however,  fell  into  disrepute,  and  its  followers  discarded 
the  name  and  began  calling  themselves  socialists. 

There  is  a  tendency  on  the  part  of  partisans  of  any  pro- 
gram or  movement  to  define  their  program  in  the  most 
favorable  terms  possible.  This  applies  to  socialists  as  well  as 
to  other  propagandists.  Sometimes  this  tendency  leads  to  a 
definition  of  socialism  which  does  not  define,  but  which  includes 
the  opponents  as  well  as  the  proponents  of  socialism.  When  it 
.is  said,  for  example,  that  socialism  teaches  the  doctrine  that  only 
he  who  produces  shall  consume,  it  may  be  replied,  "  So  also 
does  individualism,"  and  practically  every  other  ism  that  has 
anything  to  do  with  the  production  and  distribution  of  wealth. 
When  it  is  said  that  socialism  teaches  the  doctrine  of  equality 
of  opportunity,  it  may  be  replied,  "So  also  does  individualism," 
and  all  the  other  isms. 

The  difference  between  a  socialist  and  a  nonsocialist.  In 
order  to  define  socialism  we  must  find  something  which  will 
completely  distinguish  the  socialist  from  the  nonsocialist.  The 


542          PRINCIPLES  OF  POLITICAL  ECONOMY 

only  definition  that  will  do  this  is  the  following :  A  socialist 
is  one  who  believes  that  the  community,  the  public,  or  the  gov- 
ernment should  own  and  operate  the  means  of  production, 
leaving  to  individuals  the  ownership  of  most  articles  of  con- 
sumption. By  the  means  of  production  are  meant  practically 
all  that  is  included  under  the  names  land  and  capital,  —  farms, 
factories,  railroads,  mercantile  houses,  and  office  buildings 
would  all  be  included ;  under  the  program  of  socialism  all 
these  things  would  be  owned  and  operated  by  the  community, 
the  public,  or  the  government.  This  would  mean  that  almost 
every  individual  would  be  in  the  employ  of  the  government 
in  one  way  or  another.  Since  there  would  be  no  private  enter- 
prise, no  one  could  start  a  farm,  a  factory,  a  store,  or  any  busi- 
ness enterprise  of  his  own.  Since  no  one  could  start  any  such 
enterprise,  no  one  could  be  employed  by  a  private  employer. 
Since  no  one  could  be  either  in  his  own  employ  or  in  the  em- 
ploy of  any  private  organization,  almost  everyone  would  have 
to  be  in  the  employ  of  the  government. 

There  is  some  difference  of  opinion  among  socialists  as  to 
how  far  this  principle  of  government  ownership  and  operation 
should  extend.  Some  are  willing  to  stop  with  trusts  and  mo- 
nopolies. This,  however,  is  populism  rather  than  socialism.  It 
is  based  not  on  a  theory  of  capital  but  on  a  theory  of  monopoly. 
Many  people  who  favor  the  private  ownership  of  capital  are 
opposed  to  monopoly  and  believe  that  the  best  way  to  curb 
monopoly  is  to  turn  all  monopolistic  enterprises  over  to  the . 
state.  Such  a  person  might  utterly  reject  all  socialistic  theories 
respecting  capital.  Moreover,  every  thoroughgoing  socialist 
really  bases  his  conclusions  on  his  theory  of  capital.  The  work 
of  Karl  Marx,  on  "  Capital,"  has  been  called  the  Bible  of  the 
modern  socialist.  This  book  pays  very  little  attention  to  the 
question  of  monopoly  ;  it  consists  almost  entirely  of  an  analysis 
of  capital  and  capitalistic  production.  From  Marx's  point  of 
view  it  is  not  monopolized  capital,  but  capital  as  such,  that 
gives  its  owner  the  power  to  exploit  and  defraud  other 


SOCIALISM  543 

people.  The  capital  belonging  to  a  farmer  as  well  as  that 
belonging  to  a  great  trust,  to  a  small  manufacturer  as  well  as 
to  a  large  manufacturer,  to  the  driver  of  a  jitney  bus  as 
well  as  to  a  street-car  company,  is  to  be  owned  and  operated 
by  the  public. 

Socialism  is  not  populism.  On  the  other  hand,  the  slogan 
"  Let  the  nation  own  the  trusts  "  has  nothing  to  do  with  capital 
as  such.  Such  a  program  is  based  entirely  on  a  theory  of 
monopoly,  which  is  the  essence  of  populism  rather  than  of 
socialism.  Those  who  hold  to  this  doctrine  may  quite  consist- 
ently hold  to  the  idea  that  capital  which  is  not  monopolized  is 
a  help  rather  than  a  hindrance  to  labor,  that  he  who  accumu- 
lates capital  by  consuming  less  than  his  income  is  benefiting 
rather  than  injuring  labor,  and  that  therefore  everybody  ought 
to  be  encouraged  to  accumulate  capital  and  invest  it  in  produc- 
tive enterprises.  From  this  point  of  view  the  individual  who  has 
accumulated  capital  and  invested  it  in  a  productive  enterprise 
has  not  only  increased  the  productivity  of  the  community  but 
is  entitled  to  some  reward  for  that  service  which  he  has  per- 
formed. This  reward  would  be  called  interest.  The  populist, 
therefore,  would  approve  of  the  receipt  of  interest  on  the  part 
of  the  owner  of  unmonopolized  capital. 

All  the  great  authoritative  books  on  socialism  are  funda- 
mentally opposed  to  interest  or  to  anyone's  receiving  any 
income  in  the  form  of  interest.  If  labor  is  the  only  pro- 
ducer of  wealth,  the  saver  and  accumulator  is  not  a  producer 
and  is  therefore  not  entitled  to  any  share  in  the  product.  Since 
interest  is  the  share  which  goes  to  the  accumulator  and  inves- 
tor, it  cannot  be  justified  under  the  socialistic  philosophy. 

Difference  between  a  socialist  and  a  liberalist.  The  defini- 
tion of  a  socialist  as  one  who  believes  in  the  common,  public, 
or  government  ownership  of  all  the  means  of  production  sepa- 
rates the  socialist  not  only  from  the  populist  and  the  commu- 
nist but  from  the  liberalist  as  well.  Moreover,  this  is  the  only 
definition  which  will  at  all  distinguish  the  socialist  from  the 


544          PRINCIPLES  OF  POLITICAL  ECONOMY 

liberalist.  The  liberalist  is  quite  as  desirous  of  economic  justice 
and  of  equality  of  opportunity  as  the  socialist  is,  but  he  believes 
that  the  liberalistic  program  is  better  adapted  to  the  securing  of 
those  ends  than  the  socialistic  program.  The  liberalistic  pro- 
gram permits  the  private  ownership  of  capital,  and  it  also  per- 
mits the  receipt  of  interest  as  a  private  reward,  on  the  ground 
that  the  accumulation  of  capital  is  a  productive  service,  —  not 
that  it  is  philanthropic,  but  that  it  is  useful  to  society. 

In  order  to  becloud  the  issue  it  is  sometimes  stated  that  the 
socialist  believes  that  men  should  be  paid  for  doing  things  and 
the  liberalist  that  men  should  be  paid  for  owning  things.  The 
liberalist  does  not  believe  that  men  should  be  paid  for  owning 
things,  unless  the  ownership  is  a  symptom  of  their  having  done 
something  which  was  useful.  If  two  men,  A  and  B,  have  been 
doing  equally  good  work  with  their  hands  and  their  heads,  and 
have  earned  equal  incomes,  they  should  be  paid  the  same,  accord- 
ing to  the  liberalist  as  well  as  the  socialist.  If,  however,  A 
consumes  all  his  income,  but  B  invests  a  part  of  his  in  the 
tools  of  production,  the  liberalist  believes  that  B  has  done  better 
than  A.  If  everybody  did  as  A  does,  the  nation's  stock  of  tools 
would  never  increase ;  if  everybody  did  as  B  does,  the  nation's 
stock  of  tools  would  increase  rapidly.  The  more  citizens  it  has 
of  the  B  type,  the  more  prosperous  will  the  nation  become  ;  the 
more  it  has  of  the  A  type,  the  less  prosperous  it  will  become. 
It  is  very  important  that  men  should  be  encouraged  to  join  the 
ranks  of  the  B's  rather  than  of  the  A's.  The  liberalist  there- 
fore holds  that  there  should  be  some  inducement  to  men  to  do 
what  B  has  done  ;  namely,  to  invest  a  part  of  their  income  rather 
than  to  consume  it. 

In  the  smartness  of  debate  one  might  still  say  that  B  was 
thereafter  being  paid  for  owning  something,  whereas  A  was 
paid  only  for  doing  something ;  but  as  a  matter  of  fact  that 
which  B  appears  to  be  paid  for  owning  is  only  a  deferred  pay- 
ment for  that  which  he  did  before.  When  he  refrained  from 
Using  up  his  income  in  riotous  living  and  devoted  it  to  a  useful 


SOCIALISM  545 

purpose  he  postponed  the  day  of  his  enjoyment  of  his  in- 
come. It  is  virtually,  therefore,  deferred  payment  for  his  work. 
The  money  which  he  received  for  his  work  was  not  final  pay- 
ment ;  the  final  reward  of  every  individual  is  that  which  he 
consumes.  When  B  decided  to  defer  consumption,  he  was 
really  deferring  the  receipt  of  his  wages. 

There  is  no  other  definition  of  socialist  or  socialism  which 
will  separate  the  socialist  from  the  nonsocialist,  or  which  will 
particularly  separate  him  from  the  liberalist.  The  term  liberalist 
is  justified  because  the  liberalist  believes  that,  as  far  as  possible, 
each  individual  should  be  at  liberty  to  start  his  own  enterprise 
if  he  is  so  disposed  or  to  work  for  someone  else  if  he  prefers, 
—  that  he  should  be  at  liberty  to  work  for  private  individuals  or 
to  work  for  the  government,  according  as  he  can  make  the  most 
satisfactory  voluntary  agreements.  In  short,  the  liberalist  is 
willing  to  trust  men  with  the  power  of  free  contract,  whereas 
the  socialist  relies  mainly  on  the  government's  power  of 
compulsion. 

Socialism  involves  more  use  of  the  government's  power  of 
compulsion  than  liberalism  does.  It  has  been  said  that  the 
power  to  tax  is  the  only  capital  the  government  needs.  But 
the  power  to  tax  is  compulsion.  In  order  to  carry  out  a  social- 
ist program  the  public  would  have  to  use  its  power  of  com- 
pulsion in  many  ways.  It  would  have  to  prohibit  competition 
by  private  individuals  against  the  state  as  it  now  forbids  pri- 
vate individuals  to  compete  with  the  post  office  in  the  carrying 
of  first-class  mail.  It  would  have  to  use  its  taxing  power  to 
compel  the  payment  of  deficits  whenever  deficits  occurred. 
The  liberalist,  on  the  other  hand,  proposes  to  reduce  to  a 
minimum  the  compulsion  of  the  government  over  the  indi- 
vidual. An  industiy  which  cannot  be  carried  on  without 
any  compulsion  whatsoever  had  probably  better  be  left  to 
die,  unless  it  be  one  which  is  necessary  for  military  pro- 
tection. If  an  individual  who  desires  to  manufacture  shoes 
cannot  manufacture  them  successfully  without  the  power  of 


546          PRINCIPLES  OF  POLITICAL  ECONOMY 

compulsion,  he  should  not  manufacture  them  at  all.  If  he  can 
buy  his  raw  materials  on  the  open  market  and  hire  his  labor 
on  the  open  market  and  sell  his  product  on  the  open  market, 
making  use  everywhere  of  voluntary  exchange  and  voluntary 
agreement,  and  can  manage  to  make  a  profit  out  of  his  busi- 
ness, he  is  entitled  to  remain  in  business.  It  shows  that  he 
is  efficient  enough  to  assemble  the  various  factors  of  production 
in  such  a  way  as  to  produce  an  article  which  is  worth  more 
than  the  cost  of  those  factors  of  production.  This  is  highly 
economical.  If,  in  order  to  make  a  living,  he  had  to  be  paid 
out  of  the  public  treasury,  and  the  public  had  to  make  use  of 
its  power  of  taxation  in  order  to  get  the  wherewithal  to  pay 
his  salary,  there  is  a  strong  probability  that  the  product  would 
not  be  worth  as  much  as  the  factors  which  entered  into  it. 
In  that  case  the  power  to  tax  would  have  to  be  made  use  of 
to  keep  the  business  going ;  but  the  fact  that  compulsion  was 
necessary  would  be  proof  that  it  ought  not  to  be  used,  but  that 
the  business  should  die  a  natural  death. 

Where  there  is  no  free  bargain  and  sale,  —  where  consumers 
are  not  at  liberty  to  turn  from  one  producer  to  another  and 
buy  whatever  suits  them  best,  where  the  producers  of  raw  ma- 
terial are  not  at  liberty  to  sell  to  any  manufacturer  who  will  pay 
them  the  highest  price,  and  where  labor  is  likewise  not  free  to 
bargain  to  its  own  advantage,  —  there  is  no  assurance  that  the 
maximum  economy  will  be  secured. 

Compulsion  sometimes  necessary.  It  is  not  to  be  inferred, 
however,  that  the  liberalist  is  an  anarchist  and  therefore  op- 
posed to  all  exercise  of  compulsion  or  governmental  power. 
He  is  one  who  believes  that  a  great  many  lines  of  pro- 
duction can  be  safely  and  successfully  carried  on  without 
the  use  of  compulsion,  under  voluntary  agreements,  free  con- 
tract and  sale,  and  individual  initiative.  He  also  quite  frankly 
recognizes  that  there  are  many  things  which  cannot  be  done 
in  this  way.  For  example,  the  forestation  of  certain  moun- 
tain slopes  would  be  undertaken  by  private  enterprise  only 


SOCIALISM  547 

when  the  enterprisers  thought  that  it  would  be  profitable 
to  them.  But,  although  it  might  be  unprofitable  when  con- 
sidered by  itself,  it  might  still  be  highly  profitable  when 
considered  from  the  viewpoint  of  the  nation  as  a  whole.  If 
the  deforestation  of  high  mountain  slopes  results  in  the  over- 
flow of  streams  and  the  destruction  of  valuable  land  along  the 
lower  watercourses,  this  is  a  matter  which  affects  the  country 
as  a  whole  but  might  not  interest  the  individual  owners  of 
the  high  slopes.  If  they  found  it  profitable  to  cut  off  the 
timber  and  sell  it,  they  would  do  so  even  though  property  of 
much  greater  value  a  few  hundred  miles  away  on  the  river 
bottoms  were  destroyed.  Here  would  be  a  clear  case  where 
government  enterprise  would  be  superior  to  private  enterprise. 
But  similar  reasoning  would  in  some  cases  prove  the  superiority 
of  international  enterprise  over  government  enterprise.  It  might 
very  well  happen  that  the  high  mountain  slopes  were  within 
the  territory  of  one  nation,  and  the  river  bottoms  in  the  terri- 
tory of  another.  In  that  case  the  nation  owning  the  high 
mountain  slopes  would  have  no  interest  in  protecting  the 
river  bottoms.  Nothing  but  an  international  arrangement  could 
solve  that  problem. 

Again,  take  such  an  enterprise  as  the  building  of  light- 
houses. The  private  individual  who  built  a  lighthouse  on  a 
rocky  coast  would  scarcely  be  able  to  collect  toll  or  to  get 
payment  for  the  utility  which  he  was  furnishing.  Not  having 
the  power  of  compulsion,  he  could  not  force  mariners  to  pay,  nor 
could  he  tax  the  public  at  large  in  order  to  build  and  maintain 
lighthouses.  The  public  alone  has  this  power  of  compulsory 
collection.  In  any  other  case  (and  there  are  many  of  them) 
where  it  can  be  shown  that  freedom  of  contract  will  not  suc- 
ceed in  getting  an  important  work  done  or  an  important  utility 
produced,  the  liberalist  is  willing  to  see  compulsion  used. 

Socialism,  like  vegetarianism,  is  an  exclusive  term.  Liber- 
alism is  therefore  not  an  exclusive  term,  as  socialism  seems 
to  be.  In  this  respect  socialism  is  like  vegetarianism  ancj 


548          PRINCIPLES  OF  POLITICAL  ECONOMY 

certain  other  exclusive  terms.  One  is  not  a  vegetarian  by 
virtue  of  the  fact  that  one  sometimes  eats  vegetable  food ; 
one  is  a  vegetarian  only  when  one  refuses  to  eat  anything 
else.  A  liberalist  with  respect  to  food  is  willing  to  eat  any 
kind  which  seems  to  him  to  be  desirable.  In  a  similar  sense, 
one  is  not  a  socialist  by  virtue  of  the  fact  that  one  is  willing 
that  the  government  should  do  some  things  ;  one  is  a  socialist 
only  when  one  believes  that  private  individuals  should  not 
carry  on  any  productive  industry  or  own  any  productive  capital. 
The  liberalist  is  willing  that  industry  shall  be  carried  on  in 
any  way  that  seems  to  promise  desirable  results.  If  an  indi- 
vidual farmer  can  grow  corn  successfully,  the  liberalist  is  will- 
ing that  he  shall  do  so  and  make  a  profit  out  of  it ;  if  the 
individual  manufacturer  can  manufacture  successfully,  the  liberal- 
ist is  willing  that  he  shall  do  so  and  likewise  make  a  profit ; 
and  so  on.  He  perhaps  goes  a  step  farther  and  believes  that 
preference  should  be  given  to  free  and  voluntary  business 
arrangements  rather  than  to  compulsion,  and  that  compulsion 
should  be  used  only  when  the  voluntary  system  fails  to  get 
desirable  things  done. 

Criticism  always  easy.  As  to  the  merits  of  the  socialistic 
program  as  compared  with  other  programs,  there  will  always 
be  considerable  differences  of  opinion.  It  is  not  difficult  to 
point  out  with  a  great  deal  of  particularity  the  evils  that  re- 
sult from  a  liberalistic  policy.  The  unfortunate  condition  of 
those  people  who  are  not  in  a  position  to  contract  to  their 
own  advantage  is  perhaps  the  strongest  argument  used  by 
the  present-day  socialists.  It  is  very  easy  to  find  many  com- 
munities in  which  certain  classes  of  laboring  men  find  it 
impossible  to  get  good  wages  by  the  method  of  voluntary 
agreement,  whereas  other  people  who  use  this  method  get 
larger  incomes  than  are  necessary  or  desirable.  This  obser- 
vation, however,  is  not  confined  to  labor.  Anyone  who  is  try- 
ing to  sell  something  with  which  the  market  is  oversupplied 
is  in  a  more  or  less  helpless  position.  When  more  is  offered 


SOCIALISM  549 

for  sale  than  buyers  care  to  buy,  the  seller  is  very  dependent, 
whereas  the  buyer  is  independent.  Under  the  system  of  volun- 
tary agreement  the  seller  must  take  what  he  can  persuade  the 
buyer  to  pay,  and  the  buyer, can  take  his  choice.  If,  however, 
you  reverse  the  conditions,  you  find  buyers  who  want  to  buy 
more  than  sellers  are  willing  to  sell.  Then  buyers  are  very  de- 
pendent ;  they  must  take  whatever  they  can  persuade  the  sellers 
to  sell,  whereas  sellers  are  independent  and  can  take  their  choice. 
It  happens  that  certain  kinds  of  labor  seem  almost  chroni- 
cally to  be  in  this  position  of  dependence.  They  always,  and 
rightly,  evoke  sympathy.  There  are  two  ways,  however,  of 
correcting  the  difficulty.  One  is  to  substitute  the  system  of 
compulsion  for  the  system  of  voluntary  agreement ;  the  other 
is  to  make  that  kind  of  labor  scarce  and  hard  to  find.  Seeing 
that  these  unskilled  laborers  are  now  beaten  under  the  system 
of  voluntary  agreement,  it  looks  rather  obvious  to  some  people 
that  something  else  must  be  substituted.  But  the  liberalists 
maintain  that  labor  is  not  necessarily,  and  not  always,  at  a  dis- 
advantage under  the  system  of  voluntary  agreement.  If  you  can 
redistribute  the  labor  supply  so  that  there  will  not  be  too  much  of 
one  kind  in  proportion  to  the  other  factors,  then  the  laborers  will 
be  in  a  position  of  great  independence.  It  is  not  difficult  to  point 
out  instances  where  the  laborer  is  independent  and  the  cap- 
italist dependent,  —  where  the  preservation  of  the  capitalist's 
property  —  where  even  his  income  itself  —  depends  on  getting 
labor  when  there  is  not  enough  labor  to  go  around.  In  such 
cases  the  capitalist  must  take  whatever  labor  is  offered,  whereas 
the  laborer  can  take  his  choice  of  employers.  There  need  not 
be  the  slightest  difficulty  in  creating  such  conditions  for  labor 
in  general ;  but  it  will  require  the  following  of  a  program 
radically  different  from  that  of  the  socialist.  It  looks  much 
easier  merely  to  exercise  the  compulsory  power  of  the  state 
and  cure  the  difficulty  at  one  stroke.  Not  many  difficulties, 
however,  are  permanently  cured  at  one  stroke  or  by  the 
exercise  of  compulsion. 


550          PRINCIPLES  OF  POLITICAL  ECONOMY 

Why  there  are  socialists.  When  the  victim  of  a  wasting 
sickness  goes  to  a  physician  for  help,  he  is  very  likely  to  be 
disappointed.  The  physician,  if  he  is  scientific  and  therefore 
honest,  can  seldom  promise  him  a  definite  cure.  Being  a 
scientific  man  he  can  point  out  the  causes  which  produce  the 
illness,  and  say  that  if  at  some  time  in  the  past  the  patient 
had  pursued  different  habits,  he  would  not  have  become  ill. 
This,  however,  is  cold  comfort  to  the  sick  man  who  is  suffer- 
ing intense  pain.  Or  the  physician  may  prescribe  a  course 
of  treatment  which,  if  rigidly  followed  for  a  period  of  time, 
will  tend  to  remove  the  causes  of  the  illness  and  eventually 
improve  the  patient's  condition.  This  likewise  is  cold  comfort 
to  the  man  in  pain,  who  wants  immediate  relief.  Such  a  man 
is  in  a  good  frame  of  mind  to  lend  a  favorable  ear  to  the 
"  doctor  "  with  a  specific  remedy  who  promises  him  a  specific 
cure.  This  is  why  a  certain  type  of  unscientific  practitioner, 
commonly  called  a  quack,  flourishes. 

Similarly,  the  man  who  is  in  the  grip  of  poverty,  as  well  as 
his  sympathizers,  is  likely  to  be  disappointed  with  the  pro- 
gram of  the  economist.  The  economist,  if  he  is  a  scientific 
man  and  therefore  honest,  will  be  compelled  to  say  that  there 
is  no  immediate  relief  which  is  not  likely  to  produce  worse 
results  in  the  future.  Being  a  scientific  man,  he  can  point  out 
the  conditions  which  tend  to  induce  poverty,  and  can  prescribe 
policies  which,  if  they  had  been  pursued  consistently  for  a 
number  of  years,  would  have  prevented  the  poverty  which  now 
exists.  This  is  cold  comfort  to  the  man  who  is  already 
suffering  from  poverty  and  longing  for  relief.  Such  a  man 
is  in  a  condition  to  lend  a  favorable  ear  to  the  doctor  with  a 
specific  remedy.  The  obvious  and  specific  remedy  which  is 
commonly  used  is  the  compulsory  power  of  the  state  or  of  the 
mass  over  the  individual.  This  is  sometimes  called  democratic, 
but  there  is  nothing  particularly  democratic  in  compulsion. 
One  of  the  most  democratic  things  in  the  world  is  freedom  of 
contract,  —  freedom  on  the  part  of  the  individual  to  pursue 


SOCIALISM  551 

his  own  interests  so  long  as  they  happen  to  coincide  with 
those  of  the  public. 

There  is  a  close  parallelism  between  the  condition  of  the 
laborer  on  the  oversupplied  labor  market  and  the  condition  of 
the  producer  of  vendible  commodities  on  an  oversupplied 
commodity  market.  In  the  early  nineties  of  the  last  century, 
farm  products  were  greatly  oversupplied.  There  had  been  a 
rapid  settlement  of  the  fertile  prairies  of  the  West  and  a 
rapid  increase  in  the  tillable  area  on  all  the  farms.  The  result 
was  that  a  great  flood  of  agricultural  products  was  poured 
upon  the  markets  of  the  world,  depressing  prices  not  only 
in  this  country  but  in  Europe  as  well.  In  that  situation  the 
farmers  were  in  a  dependent  condition.  They  had  much  to  sell 
and  there  were  apparently  few  buyers,  —  few  at  least  relatively 
to  the  amount  of  produce  that  was  offered.  The  average  farmer 
had  to  take  what  he  could  get.  Naturally  enough  this  situa- 
tion created  dissatisfaction,  and  demands  were  made  by  the 
agricultural  classes  of  the  South  and  West  for  some  kind  of 
compulsory  action  by  the  government.  On  the  basis  of  free 
contract  they  were  at  a  great  disadvantage,  and  not  unnat- 
urally desired  to  use  some  other  method,  for  the  time  being 
at  least.  Freedom,  to  them,  frequently  meant  freedom  to 
become  bankrupt  and  to  go  hungry. 

At  the  time  of  the  present  writing  (1918)  the  conditions 
are  reversed  and  the  boot  is  on  the  other  foot.  The  world  is 
experiencing  a  great  shortage  of  agricultural  products.  Buyers 
are  everywhere  asking  for  products,  and  there  appear  to  be  few 
sellers,  —  few  at  least  relatively  to  the  number  of  buyers  and  con- 
sumers. The  consumers  are  now  in  a  position  of  great  depend- 
ence, but  the  farmers  are  in  a  position  of  great  independence. 
On  the  basis  of  free  contract  the  farmer  has  the  advantage  and 
the  consumer  the  disadvantage.  The  farmer  is  not  now  calling 
for  a  limitation  upon  the  right  of  contract.  He  is  not  demand- 
ing the  substitution  of  compulsion  for  freedom.  There  are 
demands,  however,  on  the  part  of  consumers  for  government 


552          PRINCIPLES  OF  POLITICAL  ECONOMY 

action  in  the  fixing  of  prices  and  the  control  of  marketing 
processes.  Since  he  is  at  a  disadvantage  in  the  bargaining 
process,  the  consumer  feels  that  something  else  should  be  sub- 
stituted. Freedom  to  buy  food  does  not  seem  so  very  precious. 
Farmers,  however,  are  inclined  to  protest  against  the  substi- 
tution of  compulsion  for  bargaining ;  that  is,  the  substitution  of 
price-fixing  by  the  government  for  the  policy  of  letting  demand 
and  supply  determine  the  price. 

There  was  a  time  in  England,  following  the  Black  Death, 
when  labor  seemed  to  be  abnormally  scarce  as  compared  with 
what  had  been  known  for  centuries.  The  laborer  was  able  to 
bargain  to  good  advantage.  He  did  not  then  demand  anything 
better  than  free  contract  in  the  determination  of  wages.  The 
demand  for  compulsion,  however,  came  from  the  landowners 
and  employing  classes,  and  much  severe  legislation  was  passed 
fixing  wages  and  punishing  attempts  on  the  part  of  laborers 
to  bargain  for  higher  wages. 

Generally  speaking,  however,  in  the  history  of  the  greater 
part  of  the  world,  conditions  have  been  such  that  laborers 
rather  than  employers  have  been  at  a  disadvantage  in  bargain- 
ing. Unskilled  laborers  have  generally  been  abundant.  It  has 
seldom  been  necessary  for  an  employer  to  spend  much  time 
searching  for  men  who  were  willing  to  work  for  him.  The 
searching  has  been  on  the  other  side.  Labor  being  thus  almost 
permanently  oversupplied,  it  has  led  to  a  great  many  demands 
for  the  substitution  of  compulsion  for  free  bargaining  as  a 
means  of  fixing  wages. 

Now  it  is  not  necessary  to  have  a  scourge  in  order  to  thin 
out  the  ranks  of  unskilled  labor.  The  case  of  the  Black 
Death  was  cited  merely  because  governments  have  generally 
been  so  stupid  as  to  do  nothing  about  it,  and  here  was  one 
case  where  a  scourge  proved  to  be  in  some  respects  more 
intelligent  and  generous  than  governments  have  been.  It  is 
quite  possible,  by  the  use  of  a  little  intelligence  and  progres- 
siveness,  to  create  conditions  under  which  the  demand  for  labor 


SOCIALISM  553 

will  continually  expand  and  the  supply  of  unskilled  labor 
continually  contract,  putting  the  unskilled  labor  in  a  continu- 
ally improving  situation  with  respect  to  the  bargaining  process, 
making  it  continually  easier  for  the  laborer  to  find  a  job  at 
remunerative  wages  but,  as  a  necessary  consequence,  continu- 
ally more  difficult  for  the  employer  to  find  unskilled  labor  at 
low  wages.  By  this  process  the  system  of  free  contract  could 
be  preserved  and  labor  could  be  made  independent  and  pros- 
perous at  the  same  time. 

If  this  were  done,  in  all  probability  the  demand  for  com- 
pulsion would  again  come  from  the  employing  classes.  Find- 
ing themselves  at  a  disadvantage  in  the  bargaining  process, 
they  would  seek  government  aid  in  the  fixation  of  wages  by 
compulsion.  That  evil,  however,  could  be  combated  when 
it  arose. 

Libertarians  and  compulsorians.  The  reformers  of  our  sys- 
tem of  distribution  may  therefore  be  grouped  into  two  main 
classes,  —  the  compulsorians  and  the  libertarians.  The  com- 
pulsorians are  those  who  wish  to  substitute  some  form  of  com- 
pulsion for  the  system  of  free  trade.  The  libertarians  are  those 
who  prefer  to  keep  the  system  of  free  and  voluntary  agree- 
ment rather  than  resort  to  compulsion.  They  rely  upon  free 
initiative,  not  only  in  getting  things  produced  but  in  deter- 
mining the  shares  in  distribution.  Further,  the  compulsorians 
may  be  subdivided  into  two  classes  :  first,  those  who  believe 
in  a  benevolent  despotism,  such  as  that  which  produced  most 
admirable  results  in  the  Canal  Zone  during  the  building  of  the 
Panama  Canal,  or  that  which  prevails  to  a  less  degree  in  the 
German  Empire  ;  and,  second,  those  who  believe  in  the  author- 
ity of  the  mass  over  the  individual,  where  the  will  of  the  mass 
is  indicated  by  majority  votes  and  by  the  election  of  popu- 
lar individuals  as  directors  and  administrators.  The  libertarians 
are  likewise  divided  into  groups  :  first,  those  who  believe  that 
there  is  a  logical  dividing  line  between  the  sphere  of  govern- 
ment action  which  must  always  be  compulsory  and  the  sphere 


554          PRINCIPLES  OF  POLITICAL  ECONOMY 

of  private  enterprise  which  must  always  be  voluntary  and  on 
a  free  contractual  basis ;  second,  the  extreme  anarchists  who 
do  not  believe  in  force  or  compulsion  of  any  kind,  not  even 
the  exercise  of  police  power,  much  less  of  military  power. 

The  real  conflict  between  compulsorians  and  libertarians  is 
between  the  two  intermediate  groups,  namely,  those  who  believe 
in  the  compulsion  of  a  democratic  mass  over  the  individual 
and  those  who  believe  in  a  fairly  definite  dividing  line  between 
the  sphere  of  compulsion  and  the  sphere  of  freedom  ;  in  other 
words,  it  is  the  conflict  between  socialism  and  liberalism  as 
we  find  it  in  the  world  to-day. 


CHAPTER  XLVII 

ANARCHISM 

Anarchism  and  socialism.  In  some  respects  anarchism  is 
the  diametric  opposite  of  socialism  ;  in  other  respects  it  is  some- 
what similar  to  socialism.  They  represent  opposite  tendencies 
in  that  the  socialist  proposes  to  enlarge  the  power  and  function 
either  of  the  state  or  of  some  kind  of  public  organization, 
whereas  the  anarchist  proposes  to  eliminate  all  authority,  or 
all  control  of  one  person  by  another.  Such  organization  as 
shall  exist  under  anarchism  shall  be  purely  voluntary.  Volun- 
tary groups  may  be  formed  as  large  or  as  small  as  the  indi- 
vidual members  care  to  have  them.  The  relations  of  one 
group  to  another  shall  likewise  be  on  a  purely  voluntary  or 
contractual  basis.  There  shall  be  no  state  with  a  military  arm 
or  with  police  power  of  any  kind. 

Anarchism  and  socialism  resemble  each  other  in  that  both 
revolt,  either  in  part  or  in  whole,  against  any  system  which 
gives  one  man  power  or  authority  over  another.  Many  of 
the  advocates  of  socialism  object  to  private  capital  primarily 
on  the  ground  that  it  gives  one  man,  namely,  the  capitalist 
employer,  power  and  authority  over  another  man,  the  property- 
less  laborer.  The  anarchist  says,  regarding  this  opinion  :  It 
is  good  so  far  as  it  goes.  We  anarchists  are  likewise  opposed 
to  giving  one  man  power  or  authority  over  another.  The 
private  ownership  of  capital  does  what  the  socialist  says  it  does, 
and  that  is  wrong.  We  are  therefore  opposed  to  the  private 
ownership  of  capital.  But  capital  is  not  the  only  source  of 
authority.  The  government  likewise  gives  one  man  power  or 
authority  over  another ;  the  capitalist  employer  does  not  in 
fact  have  as  much  power  or  authority  as  a  judge  or  a  policeman, 

555 


556          PRINCIPLES  OF  POLITICAL  ECONOMY 

a  governor  or  a  president.  The  socialist,  therefore,  is  only  a 
halfway  anarchist.  He  is  opposed  to  one  source  of  power  and 
authority  ;  we  are  opposed  to  both  sources. 

May  government  eventually  become  unnecessary  ?  The 
underlying  philosophy  of  anarchism  is  of  various  kinds.  There 
is  one  system  of  thought  which  is  frequently  but  improperly 
called  anarchistic.  It  is  held  by  certain  people  that  government 
and  compulsion  are  made  necessary  by  the  imperfections  in 
human  nature,  —  that  if  we  were  so  highly  developed  morally 
that  each  individual  would  voluntarily  do  what  he  ought 
to  do  or  what  was  in  the  public  interest,  then  it  would 
not  be  necessary  to  use  authority  or  compulsion  on  anybody ; 
but  since  there  are  individuals  with  undeveloped  moral  natures, 
—  individuals  who  do  not  voluntarily  and  automatically  respond 
to  the  needs  of  society,  —  it  is  therefore  necessary  that  they  be 
compelled  to  do  what  they  ought  to  do,  or  (which  is  the 
same  thing)  what  they  would  do  if  they  were  fully  developed. 

In  the  closing  paragraphs  of  his  monumental  work  on 
sociology,  which  was  in  turn  the  culmination  of  his  great  system 
of  synthetic  philosophy,  Herbert  Spencer1  sums  up  his  ideas 
as  to  the  ultimate  end  of  all  social  progress  in  the  following 
eloquent  words : 

But  if  the  process  of  evolution  which,  unceasing  throughout  past  time, 
has  brought  life  to  its  present  height,  continues  throughout  the  future,  as 
we  cannot  but  anticipate,  then,  amid  all  the  rhythmical  changes  in  each 
society,  amid  all  the  lives  and  deaths  of  nations,  amid  all  the  supplantings 
of  race  by  race,  there  will  go  on  that  adaptation  of  human  nature  to  the 
social  state  which  began  when  savages  first  gathered  together  into  hordes 
for  mutual  defence  —  an  adaptation  finally  complete.  .  .  . 

On  the  one  hand,  by  continual  repression  of  aggressive  instincts  and 
exercise  of  feelings  which  prompt  ministration  to  public  welfare,  and  on  the 
other  hand  by  the  lapse  of  restraints,  gradually  becoming  less  necessary, 
there  must  be  produced  a  kind  of  man  so  constituted  that  while  fulfilling 
his  own  desires  he  fulfils  also  the  social  needs.  .  .  . 

1  The  Principles  of  Sociology,  second  edition,  Vol.  Ill,  pp.  598-601. 
London,  1897. 


ANARCHISM  557 

Long  studies  .  .  .  have  not  caused  me  to  recede  from  the  belief  expressed 
nearly  fifty  years  ago  that  —  "  the  ultimate  man  will  be  one  whose  private 
requirements  coincide  with  the  public  ones.  He  will  be  that  manner  of 
man  who,  in  spontaneously  fulfilling  his  own  nature,  incidentally  performs 
the  functions  of  a  social  unit ;  and  yet  is  only  enabled  so  to  fulfil  his  own 
nature  by  all  the  others  doing  the  like." 

Whether  this  delectable  state  is  to  be  reached  by  the  slow 
and  somewhat  cruel  process  of  evolution,  as  Spencer  believes, 
or  by  the  process  of  moral  reform  and  religious  evangelism 
may  be  open  to  speculation.  There  are  probably  not  many 
people  who  would  disagree  with  the  general  conclusion  that 
government  would  be  unnecessary  in  either  case.  "  If  "  (but 
this  is  a  large  if]  human  nature  could  be  so  perfected,  either 
by  the  slow  elimination  of  the  unsocial  and  the  antisocial  (that 
is,  the  criminal  and  the  immoral)  or  by  their  moral  regeneration, 
it  might  very  easily  follow  that  government  would  ultimately  be- 
come unnecessary,  or  at  least  that  compulsion  by  governmental 
authority  would  become  a  thing  of  the  past.  This  position,  how- 
ever, can  hardly  be  called  anarchistic  in  any  real  sense,  for  the 
real  anarchist  believes,  not  that  government  may  ultimately 
become  unnecessary,  but  that  it  is  now  unnecessary. 

Impatience  of  restraint.  There  is  another  type  of  thought, 
sometimes  characterized  as  anarchistic,  which  does  not  revolt 
so  much  against  government  and  the  use  of  compulsion  in  the 
form  of  police  power  as  against  what  is  called  moral  compul- 
sion ;  that  is,  the  setting  up  by  society,  or  by  people  in 
authority,  of  standards  which  others  are  bound  to  follow.  It  is 
proposed,  therefore,  that  we  throw  off  the  so-called  shackles 
of  conventionality  and  even  of  morality,  and  that  everyone 
do  that  which  is  right  in  his  own  eyes,  regardless  of  what 
may  be  said  by  other  people  or  by  institutions  and  organizations 
which  pretend  to  tell  us  what  we  ought  to  do. 

Is  morality  an  invention  of  weaklings  to  curb  the  strong? 
Among  the  people  who  take  this  point  of  view,  however,  two 
diametrically  opposite  conclusions  are  reached,  There  is  one 


558          PRINCIPLES  OF  POLITICAL  ECONOMY 

school  represented  by  such  writers  as  Kaspar  Schmidt  and 
Friedrich  Nietzsche,  who  hold  that  religion  and  morality  are 
the  inventions  of  the  weaklings  of  the  world  for  the  purpose 
of  holding  the  strong  in  check.  There  is  an  old  fable  regard- 
ing the  mice  who  found  themselves  oppressed  by  the  cat. 
They  voted  unanimously  that  the  cat  should  wear  a  bell  in 
order  that  the  mice  might  be  protected.  According  to  these 
writers  religion  and  morality  are  merely  different  ways  by 
which  mice  try  to  put  the  bell  on  the  cat.  They  try  to  make 
it  unpopular  for  the  strong  man  to  use  his  strength.  They 
persuade  him  that  it  is  immoral  or  irreligious,  or  that  the 
vengeance  of  supernatural  agencies  will  be  let  loose  upon  him 
if  he  exercises  his  strength  to  the  detriment  of  the  masses. 
Therefore  the  strong  man,  sometimes  called  the  superman, 
should  break  loose  from  these  conventionalities,  should  snap 
the  cords  with  which  the  Lilliputians  have  bound  him,  and 
should  dare  to  be  great  and  independent,  and  impose  his  will 
on  the  masses  if  he  is  able  to  do  so. 

Is  morality  an  invention  of  those  in  power  to  curb  the 
masses?  The  other  school  of  anarchists,  and  certain  socialists 
who  are  anarchistic  in  spirit  if  not  in  program,  assert  that 
religion  and  morality  are  the  cunning  inventions  of  priests  and 
soldiers  and  capitalists  who  hold  the  masses  in  check  ;  that,  for 
the  average  man,  to  be  good  is  merely  to  be  good  for  some- 
body else,  that  is,  for  those  in  power, —  that  to  be  good  is  to 
support  the  priest  or  the  capitalist  or  the  policeman  or  the 
judge  or  someone  in  authority ;  that  to  be  free  is  to  be  good 
to  one's  self. 

As  to  which  of  these  two  conclusions  is  the  more  absurd, 
it  would  be  difficult  to  decide.  They  are  mentioned  to  show 
to  what  extremes  of  aberration  the  human  mind  is  capable  of 
going.  One  doctrine  would  lead  the  strong  man  to  do  as  he 
pleased,  to  impose  his  will  upon  his  neighbors  either  by  the 
weight  of  his  fist  or  by  his  superior  power  of  destruction  in 
some  other  form  ;  the  other  conclusion  would  lead  the  masses  of 


ANARCHISM  559 

the  people  to  sink  into  a  state  of  license  and  violence  which 
would  destroy  civilization  and  land  us  in  a  sort  of  primeval 
social  chaos. 

Are  all  human  interests  harmonious?  There  is,  however, 
another  system  of  thought  which  is  truly  anarchistic  and  less 
repulsive  than  either  of  these.  This  system  is  based  on  the 
fundamental  assumption  that  all  human  interests  are  harmonious. 
In  this  best  of  all  possible  worlds,  it  is  claimed,  there  can 
be  no  such  thing  as  a  conflict  of  human  interests ;  it  is  in 
some  way  a  reflection  upon  the  Creator  of  the  world  to  say 
that  there  could  be  anything  but  a  harmony  of  real  interests 
among  men  ;  it  cannot  possibly  be  true  that  one  man's  meat 
is  another  man's  poison ;  these  apparent  conflicts  are  the 
creation  of  men  and  human  institutions  and  are  not  inherent 
in  the  nature  of  man  and  the  universe. 

This  underlying  assumption  sounds  attractive,  and  doubtless 
many  of  us  would  like  to  believe  it  if  we  could.  There  are, 
however,  so  many  hard  facts  in  the  way  that  not  many  of  us 
are  able  to  bring  ourselves  to  the  point  of  ignoring  the  very 
present  and  prevalent  conflict  of  interests.  It  was  shown  in 
the  chapter  on  Scarcity  that  the  mere  fact  of  a  congestion  of 
population  —  of  too  many  people  trying  to  live  in  one  spot  — 
creates  in  that  spot  a  state  of  scarcity.  Food  enough  in  that 
particular  spot  cannot  be  produced  for  as  many  people  as 
would  like  to  live  there.  This  situation  in  itself  inevitably 
and  necessarily  produces  a  conflict  of  interests.  Either  some 
people  must  move  to  another  spot  or  food  must  be  brought 
from  other  spots  to  feed  the  people  who  are  there.  Either 
alternative  will  prove  disagreeable  to  somebody.  If  neither  of 
these  alternatives  is  chosen,  then  there  must  be  hunger ;  more 
than  one  person  will  be  wanting  each  parcel  of  food,  and  that 
in  itself  is  a  conflict  of  interests.  Here  are  certain  facts  of  a 
physical  nature  which  cannot  by  any  effort  of  the  will  or  the 
imagination  be  conjured  out  of  existence.  There  is,,  in  fact,  a 
conflict  of  interests  wherever  two  people  want  the  same  thing. 


560          PRINCIPLES  OF  POLITICAL  ECONOMY 

Conflict  of  interests  makes  control  necessary.  Wherever 
there  is  a  conflict  of  interests,  one  of  two  things  is  absolutely 
necessary :  either  the  individuals  must  have  a  high  moral 
development,  which  will  lead  each  one  to  surrender  certain 
interests  in  favor  of  others,  or  there  must  be  an  umpire  to 
decide  between  them  and  enforce  his  decision.  This  umpire, 
by  whatever  name  he  may  be  called,  exercises  the  function  of 
government.  In  fact,  this  umpire  is  government,  whether  it  be 
an  individual  or  a  great  organization  of  individuals  exercising 
various  functions,  such  as  legislation,  administration,  interpre- 
tation, enforcement,  and  so  on. 

Emotional  anarchism.  There  is  another  type  of  anarchism 
which  can  scarcely  be  said  to  have  any  underlying  philosophy. 
It  is  based  wholly  on  feeling  and  sentiment.  Doubtless  every 
human  being  possesses  some  repugnance  toward  being  ruled, 
or  being  compelled  to  do  that  which  he  dislikes  to  do,  or  to 
leave  undone  that  which  he  would  like  to  do.  A  preference  for 
one's  own  way  shows  itself  rather  early  in  the  lives  of  children. 
Doubtless  all  of  us  feel  bitter  at  times  regarding  some  act 
of  some  governing  agency  or  authority.  Generally,  however, 
we  are  able  to  keep  these  feelings  under  sufficient  control  to 
enable  us  to  obey  law  and  support  the  government.  In  other 
words,  we  generally  see  the  necessity  of  government,  however 
disagreeable  it  is  at  times  to  be  forced  to  submit.  Occa- 
sionally, however,  an  individual  will  react  in  the  other  way ; 
that  is,  his  repugnance  will  overcome  his  judgment.  He  has 
no  particular  philosophy,  though  he  can  always  invent  a  reason 
or  an  excuse.  A  policeman,  a  court,  or  a  flag,  or  any  other  evi- 
dence or  symbol  of  government  is  as  a  red  rag  in  his  face ; 
it  causes  anger,  resentment,  and  insurgency,  and  nothing 
else.  Such  people  are  sometimes  very  adorable  in  other 
respects.  So  long  as  their  feelings  are  properly  soothed  they 
may  be  exceedingly  affectionate  and  loving.  Those  who  know 
them  personally  find  it  difficult  to  reconcile  their  general 
personal  qualities  with  their  feeling  against  government. 


ANARCHISM  561 

Nevertheless,  from  any  broad  and  philosophical  point  of  view 
they  are  among  the  most  dangerous  members  of  society.  They 
are  the  unadapted  in  a  very  important  social  and  psychologi- 
cal sense.  Psychologically  they  are  as  unfit  for  living  under  a 
settled,  orderly  government  as  a  fish  is  physically  unfit  for  liv- 
ing out  of  water.  The  process  of  evolution  which,  according  to 
Spencer,  would  eventually  produce  the  delectable  state  of 
society  described  in  the  above  extract  is  steadily  weeding  such 
people  out.  They  insist  on  bumping  their  heads  against  the 
walls  of  the  universe,  and  destroying  themselves  along  with 
the  criminals  and  others  who  are  unadapted  to  a  settled  civil 
life.  If  by  the  meek  we  mean  merely  the  adaptable,  the  teach- 
able, and  the  reasonable,  and  if  by  the  unmeek  we  mean  the  in- 
tractable, the  unteachable,  the  self-willed,  the  pig-headed,  then 
it  is  probably  a  scientific  proposition  to  say  that  the  meek  "  shall 
inherit  the  earth,"  that  is,  survive,  while  the  unmeek  shall  be 
exterminated  by  the  slow  but  sure  process  of  evolution.  This 
will  be  the  ultimate  cure  for  this  type  of  anarchism. 

There  is  still  another  type  of  anarchist  who  is  merely  mean 
and  bent  on  making  trouble.  He  can  always  be  relied  upon 
to  be  on  the  wrong  side  of  every  question.  Wherever  decent, 
self-respecting  men  and  women  are  in  general  agreement  on 
any  subject,  he  will  always  be  found  opposing  them.  It  is  true, 
he  does  not  always  go  in  for  anarchism.  He  is  found  in  every 
movement  which  gives  him  a  chance  to  vent  his  general  hate 
and  spitefulness.  Wherever  there  is  a  chance  to  denounce 
government,  religion,  law,  order,  morality,  chastity,  sobriety,  or 
anything  else  that  is  of  good  report,  his  voice  is  always  heard. 
He  generally  tries  to  get  into  good  company  by  calling  himself 
a  radical,  an  iconoclast,  or  a  revolutionist,  knowing  that  excellent 
men  and  women  have  been  called  by  all  of  these  names.  He, 
however,  is  none  of  these  things  ;  he  is  just  plain  "  ornery." 

Is  patriotism  a  vice?  There  are  various  other  views,  some 
of  them  of  an  idealistic  nature,  which  savor  of  anarchism  and 
lead  to  absurd  conclusions  on  practical  subjects.  One  of  these 


562          PRINCIPLES  OF  POLITICAL  ECONOMY 

is  that  patriotism  is  a  vice.  This  strange  doctrine  is  advanced 
on  grounds  of  the  broadest  humanitarianism.  We  should  love 
all  men  equally,  it  is  urged,  without  regard  to  race,  color,  creed, 
or  nationality.  The  patriot  cares  more  for  his  fellow  citizens 
than  for  the  citizens  of  other  countries  ;  therefore,  according 
to  this  type  of  anarchism,  he  is  narrow  in  his  views.  More- 
over, if  he  thinks  more  of  his  fellow  citizens  than  of  others, 
this  will  lead  him,  in  case  of  war,  to  try  to  kill  the  citizens  of 
the  enemy  country.  Killing,  it  is  argued,  is  murder.  The  fact 
that  it  is  done  as  an  act  of  war  does  not  in  the  slightest  degree 
change  its  character. 

When  a  great  world  state  exists,  then,  of  course,  it  will  be 
proper  to  be  patriotic  toward  it.  We  may  even  work  consist- 
ently for  it.  But  to  condemn  all  patriotism  for  lesser  states 
would,  if  this  condemnation  were  effective,  merely  destroy 
existing  states,  and  all  law  and  order,  and  land  the  world  in 
chaos.  Family  sentiment  is  narrow  in  the  same  sense  that 
national  sentiment  is  narrow.  The  man  who  loves  his  wife 
must  care  more  for  her  than  for  other  women.  This,  and  all 
other  forms  of  family  sentiment  may,  in  a  sense,  make  us 
narrow,  but  it  does  not  follow  that  it  is  bad  to  be  narrow. 
Again,  if  we  are  to  avoid  narrowness,  why  be  humanitarians  ? 
Are  not  many  animals  also  companionable  and  lovable  ?  To 
show  a  preference  for  men  is  to  be  narrow  in  the  sense  in 
which  we  have  been  using  that  word. 


CHAPTER  XLVIII 
THE   SINGLE  TAX 

Meaning  of  the  single  tax.  By  the  single  tax  is  meant  a 
policy  under  which  all  the  public  revenue  is  to  be  raised  by  the 
single  tax  on  land  value.  One  of  the  most  persistent  misinter- 
pretations of  the  single  tax  is  that  of  assuming  that  it  means  a 
tax  to  be  raised  on  real  estate  rather  than  on  land  values.  Land 
value  is  defined  as  the  value  of  the  land  itself  irrespective 
of  all  improvements,  such  as  ditching,  draining,  fencing,  the 
planting  of  trees,  and  the  erection  of  buildings.  In  short,  every- 
thing done  on  the  land  itself  to  improve  the  value  of  an  estate 
is  classed  as  an  improvement  and,  under  the  single  tax,  would 
be  exempt  from  taxation.  This  leaves  nothing  except  the 
location  value  and  the  fertility  value  to  be  taxed. 

The  physiocrats,  believers  in  the  "  rule  of  nature,"  believed 
in  the  impot  unique.  The  original  advocates  of  the  single  tax 
were  a  group  of  French  economists  called  physiocrats.  It  was 
their  belief  that  land  was  the  original  and  fundamental  source 
of  all  wealth,  and  that  the  rent  of  land  was  the  only  real  surplus 
wealth  which  the  community  ever  produced.  From  their  point 
of  view,  rent  was  due  to  the  bounty  of  nature.  They  believed 
that  every  other  tax  must  eventually  be  paid  out  of  rent  anyway, 
wherever  it  may  have  been  laid  by  the  government.  If  you  tax 
the  products  of  industries,  there  is  no  surplus  out  of  which  the 
tax  can  be  paid  ;  as  a  result  you  either  raise  their  price  or  de- 
press the  price  of  the  raw  materials.  If  you  tax  labor,  you  must 
raise  wages  accordingly ;  if  you  tax  enterprise,  you  must  raise 
profits.  Every  tax,  therefore,  is  shifted  from  one  to  another 
till  it  reaches  the  landowner,  who  alone  has  a  surplus  out  of 
which  it  can  be  paid.  The  landowner  cannot  shift  it  any  farther, 

563 


564          PRINCIPLES  OF  POLITICAL  ECONOMY 

and,  since  he  must  ultimately  pay  the  tax,  they  argued  that  it 
was  better  for  him  to  pay  it  directly  in  the  first  place  than  in- 
directly after  several  shiftings  from  one  person  to  another. 
They  regarded  the  single  tax  as  a  good  system  of  taxation  for 
raising  revenue,  not  as  an  engine  of  social  reform. 

The  classical  economist  regarded  rent  as  a  peculiar  income. 
The  idea  that  landowners  who  live  entirely  upon  the  rent  of 
land  are  in  a  peculiar  sense  nonproducers  is  by  no  means 
new.  Adam  Smith1  wrote,  in  1776,  "As  soon  as  the  land  of 
any  country  has  all  become  private  property,  the  landlords,  like 
all  other  men,  love  to  reap  where  they  never  sowed,  and  demand 
a  rent  even  for  its  natural  produce."  And  again,  "  They 
[the  landlords]  are  the  only  one  of  the  three  orders  whose 
revenue  costs  them  neither  labor  nor  care,  but  comes  to  them, 
as  it  were,  of  its  own  accord,  and  independent  of  any  plan 
or  project  of  their  own."2  Economists  from  Adam  Smith 
down  have  generally  agreed  on  this  point,  though  they 
have  not  generally  agreed  that  this  is  the  great  cause  of 
poverty,  nor  that  the  abolition  of  ground  rent  would  be  a 
social  panacea. 

Ricardo,  in  developing  his  theory  of  rent,  laid  emphasis  upon 
the  fact  that  rent  arises  from  the  niggardliness  rather  than  from 
the  bounty  of  nature,  thus  taking  a  position  opposed  to  that  of  the 
French  physiocrats.  This  niggardliness  shows  itself  in  two  ways : 
first,  the  best  land  is  always  limited  in  area ;  second,  its  pro- 
ductivity is  limited.  On  any  given  area  the  amount  of  any  crop 
which  can  be  produced  is  limited  ;  and  even  before  that  limit  is 
reached,  diminishing  returns  are  received  from  successive  appli- 
cations of  labor  and  capital.  Because  of  these  limitations  upon 
the  productivity  of  the  best  land,  poorer  and  poorer  land  must 
be  taken  into  cultivation  as  the  demand  for  products  increases. 
The  fortunate,  possessors  of  the  better  grades  of  land  are  then 
in  a  position  to  demand  a  rent  for  their  land. 

1  Wealth  of  Nations,  Bk.  I,  Chapter  VI. 

2  Ibid.  Bk.  I,  Chapter  XI. 


THE  SINGLE  TAX  565 

The  single  tax  made  an  engine  of  social  reform  by  Henry 
George.  It  was  the  late  Henry  George,  in  his  book  entitled 
"  Progress  and  Poverty,"  who  seized  upon  these  ideas  to  make 
the  single  tax  an  engine  of  social  reform.  He  began  his  in- 
quiry by  pointing  out  that  even  in  the  midst  of  plenty,  poverty 
still  persisted.  He  stated  that,  though  the  productive  power 
of  the  world  had  increased  manyfold  through  mechanical  im- 
provements, nevertheless  large  numbers  of  people  remained 
in  poverty.  In  fact,  he  went  so  far  as  to  insist  that  increasing 
numbers  were  compelled  to  live  in  conditions  of  increasing 
squalor. 

The  persistence  of  poverty  the  great  reproach  upon  civiliza- 
tion. This  phenomenon  of  the  persistence  of  poverty  in  spite 
of  the  world's  increase  in  productive  power  has  been  an  enigma 
ever  since  the  rise  of  mechanical  industries.  Various  answers 
have  been  given  to  the  puzzle.  Karl  Marx  and  his  followers 
attributed  it  to  the  fact  that  the  owners  of  capital  absorb  all 
the  benefits  of  the  increase  in  productive  power,  leaving  the 
nonowners  of  capital  no  advantage  whatsoever. 

It  is  very  easy  to  say  —  in  fact,  it  looks  like  mere  arithmetic 
to  say  —  that,  with  the  same  rate  of  productiveness,  if  certain 
classes  who  are  now  receiving  large  incomes  should  not  receive 
them,  there  would  be  more  left  for  other  people.  If  the  incomes 
of  capitalists  and  landowners  were  cut  off,  more  would  be 
left  for  the  laborers,  provided  the  total  production  remained 
the  same.  It  would  be  equally  true  from  an  arithmetical 
standpoint  to  say  that  if  the  skilled  laborers  and  the  high- 
salaried  people  did  not  receive  so  much,  more  would  be  left 
for  the  rest,  if  the  rate  of  production  remained  the  same.  In 
other  words,  if  you  assume  a  given  rate  of  production,  and  then 
assume  that  the  incomes  of  certain  classes  are  cut  off,  you  can 
demonstrate  that  this  would  leave  more  goods  for  the  other 
classes.  This,  however,  is  not  a  convincing  argument.  If  any- 
one performs  an  important  function  in  society,  and  thereby 
makes  society  richer,  it  cannot  be  said  that  by  cutting  off  this 


566          PRINCIPLES  OF  POLITICAL  ECONOMY 

person's  reward  for  performing  his  function,  society  will  be 
improved.  By  the  cutting  off  of  his  reward  there  is  the  danger 
of  killing  the  goose  that  laid  the  golden  eggs ;  by  so  doing 
you  may  reduce  his  motive  for  labor  and  cause  him  to  per- 
form a  less  important  function  than  he  would  if  he  were 
adequately  rewarded  for  his  effort.  The  real  question  is,  there- 
fore, whether  the  capitalist  performs  a  function  in  society  com- 
mensurate with  the  reward  which  he  receives.  If  the  answer 
is  in  the  affirmative,  the  cutting  off  of  his  income  would  hardly 
be  a  help  to  society.  The  same  reasoning  applies  to  the 
landowner ;  if  he  performs  a  function  commensurate  with  the 
reward  which  he  receives,  it  would  obviously  not  help,  matters 
to  cut  off  his  income.  So  here  again  the  real  question  is  whether 
or  not  the  landowner  performs  a  function  commensurate  with 
the  reward  which  he  receives. 

Distinction  between  location  value  and  fertility  value.  In 
the  chapter  on  Land  we  saw  that  the  two  economic  factors  in 
land  value  were  location  and  fertility.  In  so  far  as  the  value 
of  land  is  based  primarily  on  its  fertility,  that  value  may  be 
easily  destroyed  and  with  difficulty  replaced ;  and,  in  fact,  the 
land  of  little  fertility  may,  by  careful  and  scientific  farming,  be 
greatly  increased  in  fertility.  This  increase  would  be  classed 
as  improvement,  and  the  increase  in  value  would  be  similar  to 
the  increase  which  results  from  ditching,  draining,  irrigat- 
ing, fencing,  clearing,  and  other  forms  of  improvement.  Even 
where  the  land  possessed  original  fertility,  that  is,  where 
it  is  known  as  virgin  soil,  it  may  easily  deteriorate  under  bad 
management  or  improve  under  good  management.  It  is  as 
much  in  the  interest  of  society  that  good  land  be  kept  from 
deteriorating  as  that  poor  land  be  improved  in  fertility.  If  the 
owner  of  land  is  allowed  the  advantages  of  any  improvements 
in  fertility  which  result  from  his  management,  no  one  could  of 
course  consistently  object  to  it.  Again,  if  he  is  made  to  suffer 
some  penalty  for  allowing  the  land  to  deteriorate  in  fertility 
by  his  bad  management,  it  would  seem  equally  just. 


THE  SINGLE  TAX  567 

Putting  these  two  propositions  together,  it  seems  as  though 
the  owner  of  the  land,  whether  it  be  good  or  poor  land,  should 
be  rewarded  for  any  improvement  resulting  from  his  good 
management,  and  penalized  for  any  deterioration  resulting  from 
his  bad  management.  If  the  single  tax  were  applied  rigidly, 
and  the  value  not  only  of  the  location  but  of  the  soil  itself 
were  taxed  away,  the  owner  would  get  neither  reward  nor 
penalty.  That  is  to  say,  if  he  were  taxed  for  the  full  value  of  his 
land,  while  the  soil  possessed  its  original  fertility,  he  could  easily 
"mine"  the  soil,  as  it  is  called  ;  that  is,  he  could  rapidly  exhaust 
the  fertility  and  pocket  the  temporary  advantage  from  it.  Then, 
after  the  land  became  less  valuable,  the  tax  would  have  to  come 
down,  or  the  owner  could  abandon  the  land  or  turn  it  over  to 
the  state,  whenever  it  became  so  poor  as  not  to  be  worth  the  tax. 

But  if  he  is  allowed  the  full  value  of  the  fertility  of  his  soil, 
he  has  a  much  stronger  motive  for  preserving  or  increas- 
ing its  fertility.  In  the  pursuit  of  this  advantage,  or  in  the 
warding  off  of  the  disadvantage  of  deterioration,  he  performs 
an  important  public  function,  —  that  of  conserving  the  fertility 
of  the  soil.  His  reward  will  bear  some  ratio  to  the  value  of 
the  service  which  he  performs.  To  cut  of!  his  reward  would 
not  be  to  the  advantage  of  the  public,  because  the  result 
would  be  that  he  would  allow  the  soil  to  deteriorate,  and  this 
would  result  in  a  smaller  production.  The  rest  of  society  would 
surfer  from  this  policy  along  with  the  landowner.  The  single  tax 
would  put  the  owner  in  the  position  of  a  tenant  who  had  to 
pay  the  state,  in  the  form  of  a  tax,  all  that  the  land  would 
rent  for.  Tenants  are  notoriously,  and  for  excellent  reasons, 
careless  in  the  matter  of  conserving  soil  fertility. 

In  respect  to  location  value,  this  argument  scarcely  applies. 
In  some  cases,  it  is  true,  the  enterprise  of  the  landowner  has 
created  location  value.  This  occurs  when  he  himself  builds  a 
road  instead  of  asking  the  public  to  do  it,  or  when  he  beauti- 
fies a  spot  and  makes  it  attractive  as  a  place  for  dwellers,  or 
when  he  builds  a  trolley  line  or  any  other  means  of  access  to 


568          PRINCIPLES  OF  POLITICAL  ECONOMY 

his  land.  He  may  then  be  said  to  have  created  the  location 
value  of  his  land.  In  such  cases  all  that  we  have  said  regard- 
ing fertility  value  will  apply  also  to  location  value. 

In  most  cases,  however,  the  location  value  is  not  the  creation 
of  the  individual  owner  but  of  the  general  public,  since  it  is 
the  general  public,  rather  than  the  individual  owner,  that  builds 
schools,  libraries,  and  streets,  maintains  police  systems,  and 
brings  various  utilities  within  reach.  Many  notorious  cases  are 
cited  of  men  who  have  bought  land  favorably  situated  and  have 
done  nothing  to  improve  it  and  have  even  resisted  taxation 
and  all  improvements.  Yet,  in  spite  of  such  inertia,  these  men 
have  found  themselves  rich  as  the  result  of  the  rise  in  the 
location  value  of  the  land.  A  few  such  conspicuous  cases 
furnish  effective  arguments  in  favor  of  the  single  tax. 

A  land  tax  not  necessarily  a  single  tax.  The  arguments  for 
a  single  tax  are  not  the  same  as  for  a  mere  increase  of  the 
land  tax.  One  may  favor  the  increase  of  taxation  upon  the 
location  value  of  land  without  being  in  any  sense  of  the  word 
a  single  taxer.  He  may  believe  in  many  different  taxes,  such 
as  the  inheritance  tax,  licenses,  the  income  tax,  etc.  It  would 
be  absurd  to  call  such  a  man  a  single  taxer,  even  though  he 
favored  a  special  tax  on  the  location  value  of  land.  Again, 
even  though  one  were  in  the  strict  sense  of  the  word  a  single 
taxer,  one  might  advocate  it  on  purely  financial  grounds  rather 
than  on  the  grounds  of  social  reform ;  that  is,  one  might  be- 
lieve that  all  public  revenues  should  be  raised  from  the  taxation 
of  location  values  of  land  merely  because  he  believed  that  this 
would  be  an  easy  way  of  raising  revenue,  and  not  because  it 
would  go  very  far  toward  the  curing  of  poverty. 

The  financial  arguments  in  favor  of  the  land  tax  are  fairly 
simple.  Land  cannot  be  hidden  in  the  way  that  much  personal 
property  is.  There  may  be  some  difficulty  in  appraising  its  value 
for  purposes  of  taxation,  but  the  difficulty  is  not  greater  than 
that  of  appraising  for  purposes  of  taxation  the  value  of  personal 
property,  buildings,  or  anything  else  which  is  taxable. 


THE  SINGLE  TAX  569 

Again,  a  tax  on  location  values  could  hardly  be  said  to  have 
a  repressive  effect  at  all.  If  the  tax  on  the  products  of  indus- 
tries tends  to  discourage  production,  this  cannot  be  said  to  be 
true  of  land.  Since  location  values  are  not  produced  by  the 
payer  of  the  tax,  there  is  no  production  to  discourage.  You 
may  tax  land  and  still  have  it  in  undiminished  quantities.  As 
a  cold-blooded  financial  proposition  this  has  some  merit.  Even 
though  one  may  take  away  from  the  landowner  all  its  location 
value,  the  land  itself  still  exists  in  undiminished  quantities. 

Arguments  for  the  single  tax.  The  argument  for  the  single 
tax  as  an  engine  of  social  reform  rests  on  three  general 
propositions.  In  the  first  place,  since  those  who  receive  rent 
because  of  the  location  of  their  land  create  nothing  in  return 
for  the  rent  they  receive,  their  incomes  are  merely  subtracted 
from  those  of  the  rest  of  society.  If  their  incomes  should  be 
taken  away,  this  would  not  in  any  degree  diminish  the  total 
productiveness  of  the  community.  By  a  mere  process  of  arith- 
metic it  is  easy  to  show  that  if  the  incomes  which  they  now 
receive  were  divided  among  the  rest  of  the  people,  these  other 
people  would  have  larger  incomes. 

Is  land  kept  out  of  use  for  speculation?  In  the  second 
place,  it  is  alleged  that  a  great  deal  of  land  is  kept  out  of  use 
for  speculative  purposes,  and  that  a  high  tax  on  land  values 
would  force  this  land  into  use.  The  validity  of  this  argument 
is  doubtful.  The  illustrations  given  are  usually  those  of  tracts 
of  land  found  lying  idle  in  cities  and  suburbs.  The  owners 
are  holding  them  apparently  in  the  hope  of  getting  a  higher 
price  in  the  future.  It  is  easy  to  jump  to  the  conclusion  that 
if  there  were  no  prospect  of  gain  by  so  doing,  the  owners  would 
at  once  find  a  use  for  the  land  or  sell  it  to  others  who  could 
use  it ;  but  this  does  not  take  into  consideration  the  fact  that 
there  may  be  no  immediate  use  to  which  the  owner  could 
profitably  put  the  land. 

If  an  individual,  Jones  by  name,  has  a  tract  of  land  which 
is  not  being  used,  there  is  no  reason  for  believing  that  he 


570          PRINCIPLES  OF  POLITICAL  ECONOMY 

would  be  averse  to  getting  some  income  year  by  year  while 
the  land  itself  is  rising  in  value  on  his  hands.  Thus  he  would 
get  the  rise  of  the  value  of  the  land  just  the  same  as  though 
it  were  idle,  and  he  would  get,  at  the  same  time,  whatever 
income  it  would  bring  him.  There  are  not  many  men  who 
deliberately  prefer  a  smaller  to  a  larger  income.  If  he  knew 
that  by  putting  $1000  into  even  a  small  building,  or  $100,000 
into  a  large  one,  he  could  rent  the  building  for  enough  to  pay 
the  interest  on  what  it  cost  him,  together  with  insurance, 
deterioration,  etc.,  and  have  left  even  a  small  sum  in  addition, 
he  would  certainly  be  willing  to  have  the  small  additional  sum. 
If,  however,  he  did  not  see  the  opportunity  to  use  or  rent  such 
a  building,  but,  on  the  contrary,  foresaw  that  he  would  be  obliged 
to  lose  a  part  of  the  interest,  insurance,  or  deterioration,  there 
would  be  no  motive  for  him  to  have  it  built.  In  that  case,  "even 
if  he  had  to  pay  the  single  tax,  he  would  still  leave  the  land 
idle.  He  would  rather  pay  the  single  tax  without  additional 
loss  than  to  pay  it  and  incur  an  additional  loss  besides. 

The  only  common  cases  in  which  the  land  is  actually  kept  out 
of  use  because  of  speculation  are  where  garden  land  is  pur- 
chased and  divided  into  building  lots  in  advance  of  the  demand 
for  them.  After  the  division  has  been  made,  the  land  is  no 
longer  suitable  for  farm  land  or  garden  tracts,  because  it  is 
broken  up  into  parcels  too  small  to  be  cultivated  economically. 
Meanwhile  the  public  may  be  slow  in  buying  the  lots  for 
building.  The  result  is  that  for  a  number  of  years  this  land 
practically  goes  to  waste. 

A  heavy  tax  on  land  would  exempt  other  forms  of  property. 
A  third  argument  for  the  single  tax  is  to  the  effect  that  when 
a  large  amount  of  revenue  is  raised  from  a  tax  on  land,  there 
is  no  necessity  for  so  high  a  tax,  probably  no  necessity  for  any 
tax  whatever,  on  other  things.  This  reduction  of  taxation  on 
other  forms  of  property  would  serve  as  a  stimulus  to  greater 
production.  When,  for  instance,  a  farmer  finds  that  his  cattle, 
his  crops,  and  his  buildings  are  not  taxed,  or  not  taxed  so 


THE  SINGLE  TAX  571 

heavily,  he  is  encouraged  to  develop  these  forms  of  property. 
If,  as  stated  above,  the  taxation  of  location  values  of  land 
enables  the  public  to  raise  enough  revenue  from  this  source, 
and  thereby  to  eliminate  the  taxes  on  all  other  things,  this  will 
tend  to  stimulate  business  and  production  in  general.  This 
argument  is  based  on  the  repressive  character  of  other  forms 
of  taxation  than  the  land  tax. 

It  is  probably  true  that  if  the  incomes  of  landowners  which 
come  to  them  in  the  form  of  rent  or  location  value  were 
cut  off,  more  would  be  left  to  divide  among  others ;  that  if 
land  values  were  taxed  away,  a  few  owners  would  be  forced 
to  use  land  which  is  now  idle ;  and  that  if  a  heavy  tax  were 
put  on  the  location  value  of  land,  the  taxes  on  other  things 
could  be  greatly  reduced,  thereby  stimulating  production.  The 
combined  result  of  these  three  things  would  be  to  the  profit  of 
the  nonlandowning  classes.  The  unskilled  laborers  and  other 
poor  people  would  probably  gain  a  fraction  of  this  general 
advantage,  along  with  all  other  nonlandowning  classes,  such 
as  merchants,  bankers,  manufacturers,  professional  men,  and 
skilled  laborers ;  but  that  it  would  greatly  alleviate  poverty  is 
a  proposition  which  may  be  regarded  as  very  doubtful. 

Putting  idle  talent  to  work.  A  fourth  argument,  not  usually 
brought  forward  by  single  taxers,  may  be  added  to  this  list. 
In  so  far  as  certain  owners  of  valuable  land  are  enabled  to  live 
on  the  rent  which  comes  to  them  because  of  its  location  value, 
and  to  remain  idle  instead  of  doing  productive  work,  the  com- 
munity loses  the  productive  power  of  these  men.  This  is  more 
important  than  all  the  land  kept  out  of  use  for  speculative  pur- 
poses. If  such  persons  were  deprived  of  their  incomes  and 
thereby  forced  to  do  productive  work,  the  community  would 
gain  by  this  addition  to  its  list  of  productive  workers.  This 
would  make  for  national  prosperity. 


CHAPTER  XLIX 
CONSTRUCTIVE  LIBERALISM 

What  the  liberalist  believes.  A  liberalist  in  economics  is 
one  who  believes  in  the  freedom  of  the  individual  rather  than 
in  compulsion,  either  by  the  mass  or  by  a  despot.  He  relies 
mainly  but  not  exclusively  upon  individual  initiative.  He  be- 
lieves that  individuals  will,  without  compulsion  and  under  free- 
dom of  contract,  do  whatever  is  necessary  to  provide  for  the 
needs  of  the  community.  He  believes  that  it  is  not  necessary 
continually  to  impose  upon  the  individual  the  authority  either 
of  a  benevolent  despot  or  of  a  well-meaning  majority.  In 
somewhat  extreme  cases,  such  as  can  be  covered  by  the  crim- 
inal law,  laws  for  the  enforcement  of  contracts  and  other  obli- 
gations, and  laws  for  the  standardization  of  various  aspects  of 
business,  compulsion  is  necessary  and  helpful.  He  believes 
that  the  interests  of  the  public  are  expressed  quite  as  accu- 
rately on  the  market  and  through  the  price  lists  as  through 
the  ballot  box  and  the  statute  books.  He  even  believes  that 
poverty  and  most  of  the  social  ills  can  be  eliminated  under  the 
system  of  voluntary  agreement  —  freedom  to  accumulate,  to  own, 
and  to  operate  private  property  —  and  without  subjecting  individ- 
uals to  the  necessity  of  becoming  government  employees. 

Freedom  versus  compulsion.  There  are  only  two  ways  of 
getting  men  to  do  what  is  necessary  for  their  own  maintenance 
and  that  of  the  public ;  one  is  to  induce  them  by  the  offer  of 
a  reward  either  of  a  material  or  of  an  immaterial  kind  ;  the  other 
is  to  compel  them  by  authority.  For  example,  an  army  can  be 
recruited  and  men  led  to  fight  for  their  country  either  by  the 
volunteer  system  or  by  conscription.  The  one  is  the  method 
of  freedom ;  the  other  is  compulsory  so  far  as  the  individual  is 

572 


CONSTRUCTIVE  LIBERALISM  573 

concerned,  whether  the  government  be  despotic  or  democratic. 
In  the  case  of  despotism  a  despot  exercises  compulsion  over 
the  individual ;  in  the  case  of  a  democracy  it  is  the  mass 
which  exercises  the  compulsion.  On  general  grounds  popular 
government  is  very  much  better  than  despotism ;  but  so  far  as 
the  conscripted  individual  is  concerned,  he  has  no  more  choice 
as  to  whether  he  will  fight  or  not  in  one  case  than  in  the  other. 

Industries  may  likewise  be  recruited  on  the  volunteer  system 
or  by  conscription.  Men  may  be  induced  to  work  on  the  farms 
and  in  the  factories  and  mines  by  the  offer  of  wages,  profits, 
etc.  or  they  may  be  directed  by  authority  to  do  so. 

If  no  one  were  allowed  to  accumulate  capital  or  to  own  a 
farm,  or  a  factory,  or  a  mine,  we  should  have  much  less  free- 
dom to  choose  our  own  occupations  and  to  direct  ourselves 
than  we  have  under  a  system  of  free  private  enterprise  and 
voluntary  agreement.  Even  in  an  army  the  higher  officers 
are  not  conscripted,  though  there  is  a  story  of  a  man  who 
went  into  hiding  until  the  government  should  begin  to  draft 
captains.  Under  a  regime  of  complete  government  ownership 
and  operation,  men  would  have  to  be  chosen  by  authority  for 
the  higher  as  well  as  for  the  lower  positions  in  the  industrial 
system. 

Opposed  to  socialism.  That  there  would  be  less  freedom 
under  universal  government  ownership  than  under  private 
ownership  will  be  clear  to  anyone  who  will  stop  dreaming  long 
enough  to  think  about  it.  No  one  could  begin  farming  on 
his  own  initiative  under  that  system,  but  would  have  to  be 
placed  in  charge  of  a  farm,  or  told  to  work  under  a  boss, 
according  as  those  in  authority  should  decide.  Under  a  lib- 
eralistic  system  anyone  who  can  handle  a  farm  successfully 
can  become  a  farm  manager  and  ultimately  a  farm  owner,  as 
thousands  have  already  done.  By  serving  an  apprenticeship  as 
a  farm  hand  under  a  free  contract  with  another  free  man, 
if  the  farm  hand  is  a  success  he  can  always,  after  a  few 
years  of  experience,  become  a  share  renter.  Again,  making  a 


574          PRINCIPLES  OF  POLITICAL  ECONOMY 

contract  with  another  free  man,  if  he  can  make  a  success 
of  this  he  can  in  a  few  more  years  become  a  cash  renter. 
Again,  if  he  is  successful  he  can  become  a  mortgaged  owner, 
and  finally  a  free  owner. 

Every  stage  of  this  advancement  is  conditioned  upon  his 
making  a  success  of  the  next  lower  stage.  If  he  can,  it  is, 
according  to  the  philosophy  of  liberalism,  economical  of  the 
human  resources,  as  well  as  of  the  farms,  that  he  should  be 
advanced  until  he  finds  his  level.  If  he  cannot  make  a  suc- 
cess in  any  one  of  these  stages,  it  is  a  sign  that  he  has  reached 
or  passed  his  level,  that  he  has  risen  as  far  as,  or  farther  than, 
it  is  economical  that  he  should  rise.  It  would  be  a  waste  of 
both  human  and  material  resources  to  advance  him  farther.  If, 
for  example,  he  can  succeed  as  a  farm  manager,  it  would  be 
wasting  a  good  manager  to  leave  him  in  the  position  of  a  farm 
hand.  In  the  interests  of  the  community  he  should  advance. 
But  if  he  would  make  a  poor  manager,  it  would  be  wasting  other 
labor,  as  well  as  material  equipment,  to  have  them  placed  under 
his  management.  Under  the  system  of  free  contract  each  man 
tends  to  find  the  place  in  the  industrial  system  in  which  he 
can  best  fit.  This  is  the  method  of  trial  and  error.  Each  indi- 
vidual tries  himself  out  and  does  not  have  to  wait  for  the 
consent  of  someone  else.  Under  the  system  of  universal  gov- 
ernment operation  the  would-be  farmer  would  have  no  better 
chance  to  test  himself,  or  to  advance  on  his  own  initiative,  than 
he  now  has  in  the  army  or  in  the  civil  service. 

The  liberalist  believes  that,  in  general,  the  volunteer  plan 
is  better  than  the  compulsory  one.  There  are,  of  course,  occa- 
sions when  compulsion  becomes  necessary.  These  are  usually 
occasions  of  acute  and  instant  necessity,  when  there  is  not  time 
for  the  market  to  adjust  itself  and  to  organize  a  volunteer 
system. 

In  time  of  war  compulsion  takes  the  place  of  freedom.  So- 
cialists are  in  the  habit  of  saying  that  in  time  of  war  nations 
turn  to  socialism.  It  is  true  that  in  time  of  war  compulsion 


CONSTRUCTIVE  LIBERALISM  575 

is  generally,  or  at  least  to  a  considerable  degree,  substituted 
for  freedom  ;  but  the  whole  business  of  war  is  compulsion.  Our 
dealing  with  foreign  enemies  is  necessarily  on  a  compulsory 
rather  than  on  a  voluntary  and  contractual  basis,  and  the  whole 
organization  of  society  may  have  to  be  changed  from  freedom  to 
compulsion  in  order  to  carry  on  the  compulsory  business  of  war. 

There  are  a  multitude  of  minor  forms  of  compulsion  besides 
war  itself.  Taxation  is  a  compulsory  payment  of  money  to 
the  government.  Conscription  is  compulsory  military  service. 
Forced  loans  are  compulsory  in  a  high  degree.  The  censorship 
of  the  press  is  merely  compulsory  regulation  of  the  business  of 
selling  talk  for  private  profit.  It  may  be  necessary,  in  order  to 
prosecute  a  war  successfully,  to  resort  to  compulsion  in  recruit- 
ing munition  factories  and  even  farms.  Rationing  the  popula- 
tion in  time  of  food  scarcity  may  be  necessary. 

In  a  regime  of  universal  compulsion  some  must  necessarily 
be  treated  better  than  others.  Even  though  conscription  be 
carried  out  without  personal  favor,  the  result  works  to  the  dis- 
advantage of  those  drawn  by  conscription  as  compared  with 
those  not  drawn.  Those  on  whom  the  lot  falls  act  as  shock- 
absorbers  for  the  rest  of  the  community.  There  is  nothing 
particularly  democratic  about  this,  though  it  may  be  the  best 
possible  way  of  meeting  a  national  crisis.  Under  such  condi- 
tions, when  the  life  of  a  nation  is  at  stake,  it  does  not  stop  for 
the  niceties  of  social  justice.  Necessity  knows  no  law.  It  is 
probable,  however,  that  as  a  result  of  several  years  of  this 
compulsion  there  will  be  so  much  dissatisfaction  and  sense  of 
unfairness  as  to  provoke  a  strong  reaction  against  compulsion 
and  in  favor  of  the  volunteer  system,  not  only  in  the  work  of 
fighting  but  in  business  and  industrial  pursuits  as  well.  We 
may  consider  ourselves  fortunate  if  this  reaction  does  not  carry 
us  too  far  in  the  direction  of  license  and  impatience  with 
all  restraint. 

Dangers  of  freedom.  Freedom  of  trade  —  freedom  to  buy  and 
sell,  to  offer  and  accept  rewards  —  is  a  part  of  the  program  of 


576          PRINCIPLES  OF  POLITICAL  ECONOMY 

liberalism.  There  are,  however,  some  very  serious  results 
which  accompany  freedom  of  bargaining.  We  saw  in  the  last 
chapter  that  the  advantage  in  bargaining  is  always  on  the  side 
of  those  who  are  trying  to  sell  something  which  is  undersupplied 
or  of  those  who  are  trying  to  buy  something  which  is  over- 
supplied.  Conversely,  the  disadvantage  is,  of  course,  on  the 
side  of  those  trying  to  sell  something  which  is  oversupplied 
and  of  those  trying  to  buy  something  which  is  undersupplied. 
When  there  is  a  long-continued  oversupply  of  certain  com- 
modities or  of  certain  kinds  of  labor,  those  who  are  under  the 
disadvantage  of  trying  to  sell  them  feel,  naturally  enough,  that 
the  advantages  of  free  contract  are  not  so  very  great,  since 
they  are  playing  a  losing  game.  They  are  frequently  willing  to 
take  their  chances  under  some  form  of  compulsion,  feeling 
that  they  could  not  be  much  worse  off  than  they  are  under  the 
system  of  free  contract. 

The  situation  of  those  trying  to  sell  something  that  is  over- 
supplied,  especially  if  it  happens  to  be  labor,  is  summarized  in 
the  statement  that  "  liberty  is  frequently  the  liberty  to  starve." 
It  must  be  confessed  that  liberty  is  dangerous,  even  though  it 
is  very  precious.  Severe  conditions  are  imposed  on  free  men. 
Liberty  to  be  on  the  street  may  mean  liberty  to  get  run  over 
by  an  automobile.  Liberty  to  go  swimming  may  mean  liberty 
to  drown.  Liberty  to  sail  the  seas  may  mean  liberty  to  get 
shipwrecked.  Children  who  are  restrained  in  their  liberty  and 
are  forbidden  to  be  on  the  street  are  in  less  danger  of  being 
run  over,  and  those  who  are  prevented  from  going  in  swim- 
ming are  in  less  danger  of  being  drowned.  Liberty  is  a  terrible 
thing,  but  at  the  same  time  it  is,  for  grown  men,  beyond  price. 
Liberty  to  buy  and  sell  may  mean  liberty  to  become  bankrupt. 
The  individual  who  has  a  guardian  to  forbid  him  to  do  any 
bargaining  whatsoever  may  be  saved  from  bankruptcy. 

Advantages  and  disadvantages  of  freedom  of  contract.  We 
saw  in  the  last  chapter  that  when  farm  products  are  over- 
supplied,  as  they  were  in  the  early  nineties  of  the  last  century, 


CONSTRUCTIVE  LIBERALISM  577 

the  farmer  is  at  a  disadvantage  in  bargaining.  When  he  was 
compelled  to  take  low  prices  for  his  products,  in  many  cases  he 
was  impoverished.  There  are  only  two  possible  ways  out  of 
such  a  difficulty :  the  first  way  is  to  restore  the  equilibrium 
between  the  demand  and  supply,  so  that  the  prices  of  products 
shall  rise  to  a  remunerative  level  and  the  farmer  be  enabled  to 
bargain  advantageously;  the  second  is  for  the  government  to 
exercise  its  power  of  compulsion  in  favor  of  the  farmer  and 
against  those  who  have  the  advantage  on  the  market.  At  the 
present  time  (1917)  the  reverse  of  these  conditions  exists.  The 
consumer  is  the  one  who  is  at  a  disadvantage,  since  he  is  trying 
to  buy  undersupplied  goods.  Again,  there  are  two  ways  out: 
first,  to  increase  the  products  and  restore  the  equilibrium 
between  the  demand  and  supply ;  second,  for  the  government- 
to  resort  to  some  sort  of  compulsion  in  favor  of  the  consumer 
and  against  the  farmer  or  the  dealer.  The  liberalist  is  one  who 
prefers  to  restore  the  equilibrium  and  then  allow  the  free 
bargaining  process  to  go  on. 

In  much  the  same  way  there  has  been  what  seems  like  a 
chronic  oversupply  of  the  lower  grades  of  unskilled  labor. 
This  has  made  it  difficult  for  the  unskilled  laborers  to  secure 
remunerative  wages  ;  that  is,  wages  high  enough  to  support  their 
families  in  comfort.  At  the  present  time  in  the  United  States 
of  America  (1918)  there  appears  to  be  a  scarcity,  or  at  least 
there  is  no  longer  such  an  oversupply,  of  labor  as  formerly 
existed.  Immigration  from  Europe  has  almost  ceased,  owing 
to  the  European  war,  and  at  the  same  time  the  country  is  try- 
ing to  expand  various  lines  of  production. 

In  ordinary  times,  however,  for  some  hundreds  of  years 
back,  the  unskilled  laborer  has  been  at  a  disadvantage.  A  great 
many  sympathetic  people  have  assumed  that  there  was  some- 
thing inherent  in  the  nature  of  labor  that  put  the  laborer 
at  a  disadvantage,  and  something  inherent  in  the  nature  of 
capital  that  put  the  capitalist  at  an  advantage  in  the  bargain- 
ing process.  This  is  not  true,  although,  as  we  have  seen  above, 


578          PRINCIPLES  OF  POLITICAL  ECONOMY 

conditions  have  generally  been  more  favorable  for  the  capitalist 
than  for  the  unskilled  laborer.  But  whenever  and  wherever 
unskilled  labor  has  been  hard  to  find,  the  advantage  has  been 
quite  as  much  on  the  side  of  the  unskilled  laborer,  and  the 
disadvantage  quite  as  much  on  the  side  of  the  employer. 
Whenever  it  has  been  possible  for  an  employer  to  hang  out 
his  shingle  saying  "  Men  Wanted  "  and  have  ten  men  apply 
for  each  position,  the  conditions  have  been  favorable  for  the 
employer  and  unfavorable  for  the  laborer.  The  fact  that  there 
are  more  men  applying  for  jobs  than  there  are  jobs  to  be  had 
is  a  sure  indication  of  an  oversupply  of  labor.  The  case  is 
parallel  to  that  which  would  exist  if  a  buyer  of  wheat  could 
hang  out  a  sign  "  Wheat  Wanted  "  and  have  many  times  more 
wheat  offered  than  he  could  buy.  That  would  be  a  sure  indi- 
cation of  the  oversupply  of  wheat.  On  the  other  hand,  if  a 
farmer  should  put  up  a  sign  which  read  "  Wheat  for  Sale  " 
and  find  that  many  more  buyers  than  he  could  supply  were 
coming  to  purchase  wheat,  that  fact  would  indicate  an  under- 
supply  of  wheat.  Similarly,  if  a  laborer,  by  putting  out  a  sign 
"  Job  Wanted "  should  have  several  employers  coming  after 
him,  this  fact  would  indicate  an  undersupply  of  labor. 

Making  the  advantages  even  on  both  sides.  The  policy  of 
the  constructive  liberalist  is  indicated  by  these  observations. 
It  is  his  opinion  that  conditions  can  be  created  under  which 
the  average  employer  will  find  it  as  hard  to  get  a  man  to 
work  for  him  at  liberal  wages  as  the  man  will  find  it  to  get 
an  employer  to  hire  him  at  those  wages.  When  that  is  accom- 
plished, the  advantages  in  bargaining  will  be  about  even. 
Labor  would  no  longer  be  under  a  handicap  in  the  bargaining 
process.  Laborers  will  no  longer  feel  the  need  of  some  com- 
pulsory restriction  upon  bargaining  but  will  feel  quite  able  to 
take  care  of  themselves  without  help  from  the  government  or 
any  other  compulsory  agency. 

A  program  looking  in  this  direction  may  take  a  little  longer 
to  work  out,  but  from  the  point  of  view  of  the  constructive 


CONSTRUCTIVE  LIBERALISM  579 

liberalist  the  results  once  achieved  are  vastly  preferable  to  any 
achieved  under  a  compulsory  system.  There  is  an  old  story 
about  a  wagoner,  one  of  whose  wagon  wheels  got  into  a  deep 
rut.  Instead  of  trying  to  extricate  it  he  sat  down  by  the  side 
of  the  road  and  called  upon  Hercules  to  aid  him.  The  story 
goes  that  Hercules  replied  that  if  the  man  would  put  his 
shoulder  to  the  wheel,  he  could  get  out  of  the  difficulty  with- 
out calling  on  outside  help.  This,  according  to  the  liberalist, 
represents  a  general  tendency  in  human  nature.  The  govern- 
ment is  our  Hercules,  and  whenever  we  get  into  difficulties 
we  are  in  the  habit  of  sitting  down  and  crying  vociferously 
for  the  government  to  come  and  do  something.  Even  though 
we  have  only  the  vaguest  ideas  as  to  what  the  government 
could  do,  we  still  insist  that  it  do  something  or  other.  To  be 
sure,  there  are  some  things  which  only  the  government  can 
do.  No  other  agency  than  the  government  can  be  intrusted 
with  any  kind  of  compulsion  ;  and  if  compulsion  is  necessary, 
of  course  we  must  then  call  upon  the  government.  To 
paraphrase  an  old  remark,  the  individual's  extremity  is  the 
government's  opportunity. 

"  Doing  something  "  for  people.  Beneficence  is,  of  course, 
a  characteristic  of  good  government ;  but  many  of  us,  accord- 
ing to  the  liberalist,  have  never  reached  the  point  where  we 
can  understand  that  a  "  beneficent  letting  alone  "  is  sometimes 
the  most  beneficent  thing  the  government  can  give  us.  There 
are  many  people  who  feel  that  when  they  are  ill  the  doctor 
must  "  do  something."  They  do  not  realize  that  sometimes 
the  most  beneficent  thing  the  doctor  can  do  is  to  do  nothing. 
A  doctor  whose  desire  is  to  please  his  patients  may  feel  under 
some  compulsion  to  do  something  for  them,  even  if  it  is  noth- 
ing more  than  to  give  them  bread  pills.  From  the  standpoint 
of  the  liberalist  much  of  our  so-called  social  legislation  consists 
of  bread  pills. 

Sometimes,  however,  it  is  really  necessary  that  the  doctor 
should  do  something.  The  doctor  whose  skill  consists  in  his 


580          PRINCIPLES  OF  POLITICAL  ECONOMY 

ability  to  cure  sickness  rather  than  to  please  patients  will  have 
enough  to  do,  provided  the  people  know  enough  to  appreciate 
him.  The  same  may  be  said  of  a  government.  There  are  a  few 
really  vital  things  that  a  government  may  do.  If  it  succeeds 
in  doing  these  few  things  well,  it  will  then  be  unnecessary  to 
do  the  thousand  and  one  trivial  things  that  it  is  asked  to  do. 

So  far  as  this  country  is  concerned,  probably  the  most  far- 
reaching  and  constructive  piece  of  legislation  in  the  last  genera- 
tion has  been  the  restriction  of  immigration.  This  is  one  of  the 
few  acts  of  the  government  which  go  directly  to  the  root  of 
the  difficulty  of  low  wages  and  poverty.  It  is  an  act  which 
definitely  aims  at  reducing  the  oversupply  of  unskilled  labor. 
It  is  true  that  it  does  not  go  far  in  this  direction,  but  at  least 
it  indicates  to  the  public  that  the  government  has  recognized 
the  source  of  the  difficulty  and  is  no  longer  proceeding  on 
general  guesswork  in  an  attempt  to  overcome  it.  If  it  will  go 
a  little  farther  in  the  same  direction,  it  will  make  unskilled 
labor  so  scarce  and  hard  to  find  that  the  unskilled  laborer  will 
no  longer  be  at  a  disadvantage,  but  can  bargain  on  even  terms 
with  employers  and  secure  living  wages  for  himself  without 
help  from  anybody. 

A  low  standard  of  living  and  a  high  birth  rate.  But  immi- 
gration from  Europe  and  Asia  is  not  the  only  source  of  over- 
supply  of  unskilled  labor.  The  inordinately  high  birth  rate 
among  the  ignorant  and  unskilled  is  another  large  source  of 
cheap  labor.  Nothing,  apparently,  but  a  rise  in  the  standard 
of  living  will  reduce  the  volume  of  this  stream.  A  rise  in  the 
standard  of  living  means  an  increase  in  the  number  of  things 
which  the  average  man  or  woman  thinks  necessary  to  the 
support  of  the  family.  The  more  things  they  feel  they  must 
have  before  they  can  marry  and  support  a  family,  the  longer 
they  will  postpone  marriage.  The  longer  they  put  off  marry- 
ing, the  smaller  number  of  children  there  will  be  in  the  family, 
partly,  at  least,  because  the  child-bearing  period  of  the  wife  is 
reduced.  If  the  age  of  marriage  is  raised  on  the  average  from 


CONSTRUCTIVE  LIBERALISM  581 

eighteen  to  twenty-three,  there  are  five  less  years  during  which 
the  wife  may  bear  children. 

Families  too  small  among  the  educated  classes.  The  restric- 
tion of  immigration  among  the  ignorant  and  unskilled,  of 
course,  has  nothing  to  do  with  the  restriction  of  immigration 
among  the  educated  and  skilled.  The  latter  are  as  free  to  come 
as  when  immigration  was  unrestricted.  Similarly,  a  rise  in  the 
standard  of  living  among  the  ignorant  and  unskilled  has  nothing 
to  do  with  the  marriage  and  the  birth  rate  among  the  educated 
and  skilled.  Among  the  latter  classes  the  reform  ought  to 
proceed  in  quite  the  opposite  direction.  There  is  no  doubt 
that  among  these  people  marriages  are  postponed  too  long, 
and  the  average  families  are  too  small. 

Increasing  the  supply  of  employers.  The  decrease  in  the 
number  of  people  born  with  the  heredity  and  prospective  train- 
ing which  fit  them  for  skilled  positions,  and  for  positions  in  the 
ranks  of  the  employing  class,  tends  to  reduce  the  demand  for 
unskilled  labor.  Hitherto,  unskilled  laborers  have  suffered  from 
two  causes  :  the  fact  that  there  have  been  too  many  unskilled 
laborers,  and  the  fact  that  there  have  been  too  few  employers. 
It  is  as  though,  in  the  badly  balanced  ration  of  an  individual 
or  an  animal,  the  too  abundant  ingredient,  say  starch,  were  to 
be  increased  more  and  more,  and  the  too  scarce  ingredient,  say 
protein,  were  to  be  decreased  more  and  more.  The  combined 
result  of  increasing  the  one  and  decreasing  the  other  would  pro- 
duce a  more  and  more  unbalanced  ration,  to  the  detriment  of 
the  man  or  the  animal.  The  continuous  increases  in  the  ranks 
of  the  unskilled  laborer  through  immigration  and  the  high  birth 
rate,  and  the  decrease  in  the  highly  skilled  and  managerial  labor 
through  the  postponement  of  marriage,  and  various  other  causes, 
has  produced  a  progressively  unbalanced  population,  tending 
to  make  unskilled  labor  very  cheap  and  highly  skilled  and 
managerial  talent  very  dear. 

Fortunately  the  effect  of  this  combination  of  processes  has 
been  offset,  at  least  partially,  by  our  system  of  popular  education. 


582          PRINCIPLES  OF  POLITICAL  ECONOMY 

Such  a  system  of  universal  and  popular  education  has  the 
effect  of  redistributing  talent,  of  taking  young  people  who 
would  otherwise  have  remained  in  the  ranks  of  the  unskilled 
and  training  them  for  the  ranks  of  the  skilled,  the  managerial, 
and  the  entrepreneur  class.  This  tends  to  reduce  the  supply 
of  ignorant  laborers  and  increase  the  supply  of  educated  workers. 
If  the  system  of  popular  education  continues  to  improve,  and 
greater  and  greater  restrictions  are  placed  upon  the  importation 
of  unskilled  labor,  and  a  higher  standard  of  living  is  acquired 
by  our  own  unskilled  laborers,  the  combined  results  of  these 
three  changes  will  tend  to  make  unskilled  labor  scarce  and 
hard  to  find,  and  to  make  jobs  abundant  and  easy  to  find,  and 
give  the  unskilled  laborer  the  advantage  not  only  of  retaining 
his  liberty  of  contract  but  of  prospering  under  it.  If  we  carry 
out  our  educational  policy  to  its  logical  limit,  and  train  not  only 
skilled  laborers  but  also  managers  and  employers,  and  at  the 
same  time  create  a  more  rational  standard  of  living  and  better 
moral  conditions  among  these  classes,  the  combined  results  of 
these  two  policies,  that  is,  training  men  for  the  high  positions 
and  encouraging  larger  families  among  them,  will  so  increase 
the  numbers  of  the  managerial  class  as  to  take  away  their 
present  advantage  in  the  bargaining  process.  By  following 
this  general  process  throughout  all  ranks  of  society  we  may 
expect  in  a  short  time  so  to  even  up  the  advantages  of  bar- 
gaining as  to  give  us  something  approximating  equality  without 
substituting  compulsion  for  freedom. 

Thrift  and  the  laborer.  The  encouragement  of  thrift  will 
tend  in  the  same  direction  and  will  accelerate  the  process  of 
putting  unskilled  labor  in  a  position  to  prosper  under  freedom. 
It  is  through  thrift  that  capital  accumulates.  When  capital  be- 
comes so  abundant  that  the  average  owner  of  capital  has  great 
difficulty  in  finding  an  opportunity  to  use  it,  he  will  have  to  be 
content  with  a  smaller  share  in  the  products  of  industry. 

The  encouragement  of  productive  enterprise,  the  frank 
acknowledgment  of  our  obligation  to  the  man  who  shows  the 


CONSTRUCTIVE  LIBERALISM  583 

ability  to  plan  a  new  enterprise  and,  what  is  vastly  more  im- 
portant, to  make  it  actually  succeed,  will  do  a  great  deal  to  ex- 
pand the  opportunities  for  those  of  us  who  do  not  possess  that 
kind  of  ability.  The  more  such  men  we  can  develop  in  our 
midst,  the  more  our  industries  will  expand  and  the  more  oppor- 
tunities for  remunerative  employment  there  will  be  for  the 
rest  of  us. 

Poverty  easily  curable  under  freedom.  We  need  not  have 
poverty  in  our  midst  a  generation  longer  than  we  want  it. 
By  setting  to  work  deliberately  to  balance  up  our  population, 
making  ignorance  and  lack  of  skill  to  disappear,  and  making 
technical  training  and  constructive  talent  to  increase,  we  can, 
in  a  short  space  of  time,  make  low  wages  and  poverty  a  thing 
of  the  past.  What  is  even  better,  we  can  do  this  and  still 
leave  everyone  a  free  man.  This  is  the  gospel  of  the  new,  or 
constructive,  liberalism  which  is  destined  to  bring  relief,  if 
not  to  this  nation,  at  least  to  some  nation  which  has  the  wis- 
dom to  adopt  it,  and  which,  when  adopted,  will  keep  that  nation 
in  the  position  of  leadership  among  all  the  nations  of  the  earth. 


A  LIBERALIST'S   PROGRAM  FOR  THE  COMPLETE  ABOLITION 
OF  POVERTY1 

I.  LEGISLATIVE  PROGRAM 

A.  For  the  redistribution  of  unearned  wealth. 

1 .  By  increased  taxation  of  land  values. 

2.  By  a  graduated  inheritance  tax. 

3.  By  control  of  monopoly  prices. 

B.  For  the  redistribution  of  human  talent. 

i .  By  increasing  the  supply  of  the  higher,  or  scarcer,  forms  of  talent. 
(a)  By    vocational    education,    especially    for    the    training    of 

business  men. 
(ff)  By  cutting  off  incomes  which  support  capable  men  in  idleness. 

1  Compare  the  author's  work  entitled  "  Essays  in  Social  Justice,"  Chapter 
XIV.    Harvard  University  Press,  1915. 


584          PRINCIPLES  OF  POLITICAL  ECONOMY 

2.  By  decreasing  the  supply  of  the  lower,  or  more  abundant,  forms 
of  labor  power. 

(a)  By  the  restriction  of  immigration. 

(b)  By  the  restriction  of  marriage. 

(1)  By  the  elimination  of  defectives. 

(2)  By  the  requirement  of  a  minimum  standard  income. 
(c}  By  a  minimum-wage  law. 

(d)  By  fixing  building  standards  for  dwellings. 

C.  For  the  increase  of  material  equipment. 

1 .  By  increasing  the  available  supply  of  land. 

2.  By  increasing  the  supply  of  capital. 

(a)  By  encouraging  thrift  versus  luxury. 

(b)  By  building  up  savings  institutions. 

(c)  By  making  investments  safe. 

II.    NONLEGISLATIVE   PROGRAM 

A.  For  raising  the  standard  of  living  among  the  laboring  classes. 

1.  The  educator  as  the  rationalizer  of  standards. 

2.  Thrift  and  the  standard  of  living. 

3.  Industrial  cooperation  as  a  means  of  business  and  social  education. 

B.  For  creating   sound   public   opinion   and   moral  standards   among 

the  capable ;  for  example, 

1 .  The  ambition  of  the  family-builder. 

2.  The  idea  that  leisure  is  disgraceful. 

3.  The  idea  that  the  productive  life  is  the  religious  and  moral  life. 

4.  The  idea  that  wealth  is  tools  rather  than  a  means  of  gratification. 

5.  The  idea  that  the  possession  of  wealth  confers  no  license  for 

luxury  or  leisure. 

6.  The  idea  that  government  is  a  means,  not  an  end. 

7.  Professional  standards  among  business  men. 

C.  For  discouraging  vicious  and  demoralizing  developments  of  public 

opinion ;  for  example, 

1 .  The  cult  of  incompetence  and  self-pity. 

2.  The  gospel  of  covetousness  or  the  jealousy  of  success. 

3.  The   idea   that    the  capitalization   of   verbosity   is   constructive 

business. 


INDEX 


Adams,  H.  B.,  294 
Adams,  Henry  C.,  503,  507 
Advertising,  253 
Agricultural  credit,  314 
Agriculture,  215 
Anarchism  and  socialism,  555 
Animal  power,  238 
Armageddon,  the  real,  499 
Authority,  exercise  of,  57 

Bacheller,  Irving,  49,  note 

Bagehot,  50 

Balance-of-trade  argument,  340 

Banana,  the,  1 50 

Bank  check,  origin  of,  306 

Bank  of  England,  309 

Bank  notes,  309 

Banks,  essential  work  of,  305 

Bargaining,  comparative  advantages 

in,  400 ;  collective,  402 
Bastiat,  Frederic,  73 
Brands  and  trade-marks,  326 
Buckle,  Henry  T.,  80,  81,  150,  note 
Bullock,  C.  J.,  223,  note 

Capital,  how  increased,  99 ;  definition 
of,  155;  productivity  of,  167,  425; 
reason  for  scarcity  of,  429 

Cattle  trail,  the  Texas,  201 

Civilization,  the  pent-up  versus  the 
expanding  type,  151 

Clearing  house,  306 

Closed  shop,  405 

Collective  bargaining,  402 

Communism,  meaning  of,  531  ;  rela- 
tion of,  to  anarchism,  532  ;  experi- 
ments in,  533 ;  American  experi- 
ments in,  535  ;  results  of,  539 


Communistic  societies,  American,  536 
Competing  power,  formula  for,  496 
Competition,  42 
Competitive  consumption,  45 
Compulsion,  elimination  of,  506;  ver- 
sus voluntary  agreement,  47 ;  versus 
freedom,  531  ;  occasional  necessity 
for,  546 ;  necessity  for,  in  war  time, 

574 

Confidence  and  economy,  53 
Conflict,  of  interests,  36 ;   forms  of, 

38 

Consumers,  idle,  68 

Consumers'  goods,  classes  of,  472 

Consumption,  meaning  of,  453 ;  im- 
portance of,  454 

Cooperation,  where  successful,  44 ; 
fields  for,  46;  limiting  factor  in, 
178 

Corporation,  the,  169;  some  weak- 
nesses of  the,  170;  character  of 
the,  171  ;  size  of  the,  172 

Cost,  283 ;  is  disinclination,  284 ; 
kinds  of,  286 ;  pain,  287  ;  increas- 
ing, 288  ;  of  war,  525 

Country  people,  self-employment  of, 
216 

Crime,  meaning  of,  40 

Crops,  location  of,  79 ;  advantage  of 
heavy-yielding,  148 

Demand  and  supply,  274 
Dependableness,  106 
Desires,  expansion  of,  281 
Diminishing  returns,  law  of,  21 1  ;  and 

increasing  cost,  288 
Diminishing  utility,  278 
Division  of  labor,  successive,  381 


585 


PRINCIPLES  OF  POLITICAL  ECONOMY 


Double  taxation,  507 
Dunbar,  Charles  F.,  307 
Durable  goods,  preference  for,  457  ; 
as  investment  for  future,  463 

Economic  crises,  list  of,  331 
Economic  goods,  12 
Economics,  branches  of,  2 
Economy,  meaning  of,  3 ;  necessity 

for,  4 ;  enforced,  522 
Effort,  irksomeness  of,  283 
Ely,  Richard  T.,  229 
Employers,  increasing  supply  of,  581 
Energy,  solar,  137 
Enterprise,  the  lure  of,  442 
Exchange,  9,  264  ;  advantages  of,  338 
Extractive   industries,   instability  of, 

207 

Factors  of  production,  366 

Fallacies,  characteristic,  523 

Farm  machinery,  84 

Farmer,  independence  and  depend- 
ence of,  215 

Farming,  intensive,  147 ;  intensive, 
and  poverty,  148 

Federal  Farm  Loan  Board,  divisions 

of,  3iS 

Federal  Reserve  system,  311 
Federation  of  trade  unions,  404 
Financial  crises,  329 
Financing  a  war,  514 
Fish  culture,  220 
Fishing,  198 
Forestry,  219 
Forethought,  104 
Freedom  of  contract,  advantages  and 

disadvantages  of,  576 
Freedom  versus  compulsion,  531,  572 

George,  Henry,  565 
Getting  and  spending,  6 
Gold  prices,  296 
Goods,  15 


Government,  256 
Government  control,  61,  488 

Hadley,  A.  T.,  233,  note 

Heredity  and  training,  115 

Home  market,  342 

Human  interests,  conflict  of,  359,  559 

Humboldt,  150 

Huntington,  Ellsworth,  82,  332 

Immigration,  effect  of,  397 
Income  and  expenditure,  7 
Industrial  depressions,  330 
Industries,  the  indoor,  150;  the  out- 
door, 208  ;  the  genetic,  208 
Infant  industries,  343 
Interest,  functional  theory  of,  437 
Interest,  relation  to  value  and  price, 

436 

Interest  in  others,  27 
International  competition,  498 

James,  William,  115 
Johnson,  John,  293 
Jones,  Edward  D.,  331 
Joy  in  work,  467 

Kipling,  8 1 

Labor,  93;  division  of,  119;  advan- 
tages of,  120;  organization  of,  130 

Labor  union,  404 

Laborer  and  capitalist,  162 

Land,  96 ;  economic  properties  of, 
142 ;  differences  in  desirability  of, 
410 

Land  tax  compared  with  single  tax, 
568 

Law,  need  for,  50 

Leisure  versus  luxury,  493 

Leisure  class,  67 

Liability,  limited,  170 

Liberalism  versus  socialism,  543,  545  ; 
policy  of,  578 


INDEX 


587 


Libertarians  and  compulsorians,  553 
Lumbering,  203 
Luxuries,  475 

Luxurious  consumption,  effect  on 
labor,  492 

McCulloch,  J.  R.,  477 

Machinery,  advantages  of,  1 22  ;  farm, 
135  ;  and  production,  223 

Malthus,  395 

Man  power,  conservation  of,  460 ; 
sources  of,  521 

Manufacturing  establishments,  221 

Margin  of  cultivation,  411 

Marginal  productivity  and  average 
productivity,  371 

Market  value,  criticisms  on,  267 

Marketing,  essentials  of,  318  ;  cooper- 
ative, 320 

Marriage,  age  of,  117 

Marshall,  Alfred,  223,  351,  note,  474 

Mechanical  power,  239 

Merchandising,  249 

Middleman  as  a  timesaver,  246 

Mill,  John  Stuart,  258,  477 

Mineral  lands,  98 

Miser  and  spendthrift,  463 

Military  defense,  346 

Mining,  206 

Money,  one  form  of  social  capital, 
157  ;  a  labor-saving  invention,  292; 
substitutes  for,  293 ;  qualities  in 
material  of,  295  ;  kinds  of,  in  United 
States,  298 ;  speeding  up  circula- 
tion, 515  ;  amount  necessary  in  war 
time,  516 

Monopoly,  290 

Morality,  teaching  of,  65  ;  reasons  for, 
557,  558 

National  banking  system,  311 
Necessaries,  472 
Niggardliness  of  nature,  281 
Noncompeting  groups,  398 


Occupation,  influence  of,  214 
Opportunity  cost,  285 
Ox,  displacement  of,   133;  historical 
importance  of,  135 

Partnership,  168 

Personal  utility,  245 

Peschel,  81,  82 

Physiocrats,  563 

Population,  geographical  redistribu- 
tion of,  1 88 

Population,  law  of,  395 

Poverty,  how  curable,  583 

Power,  animal,  132;  kinds  of,  141 

Precious  metals,  296 

Prices,  control  of,  176 

Producers'  and  consumers'  goods, 
260,  261 

Production,  definition  of,  87  ;  length- 
ening process  of,  165  ;  combination 
of  factors  of,  165 

Productive,  meaning  of,  356 

Productive  life,  promotion  of,  52 

Productivity,  great  law  of,  212 

Profits,  definition  of,  441 

Protective  tariff,  348 

Railway,  monopolistic  character  of 
a,  242 

Railways,  240;  public  or  private,  241- 
243  ;  short-  and  long-distance  haul- 
ing, 242 

Religion,  81 

Rent,  definition  of,  409 ;  reason  for, 
409  ;  economists'  theory  of,  564 

Residual  share,  447 

Revenue  system,  marks  of  a  good,  507 

Revenues,  classification  of,  503 

Ricardo,  564 

Risk,  irksomeness  of,  443 

Risk-taking,  necessity  of,  443 

Robinson,  E.  V.,  188,  note,  455 

Ross,  E.  A.,  54,  512 

Rothamsted  experiments,  373 


588 


PRINCIPLES  OF  POLITICAL  ECONOMY 


Savings  banks,  305 

Scarcity,   causes  of,   281  ;   of   labor, 

causes  of,  391 

Scientific  management,  186 
Self-centered  appreciation,  29 
Self-interest,  definition  of,  22  ;  and 

public  uses,  35 

Sexes,  interdependence  of,  218 
Shaw,  Albert,  230,  note 
Single  tax,  563,  569-571 
Skill,  cost  of  acquiring,  390 
Small  industries,  decay  of,  229 
Smith,  Adam,  61,  119,  120,  130,  256, 

474,  511,  564 
Smith,  J.  Russell,  147 
Sobriety,  108 
Social   income,   distribution   of,    10 ; 

utilization  of,  1 1 
Socialism,  and  communism,  541  ;  and 

populism,  543  ;  and  liberalism,  543, 

545 

Society,  the  cooperative,  177 
Spartan  communism,  534 
Spencer,  Herbert,  556 
Sprague,  O.  M.  W.,  307,  note 
Standard  of  living,  344,  393,  461,  495  ; 

and  birth  rate,  580 
Standard  money,  300 
Standardization,  252 ;  and  economy,  55 
Steam  engine,  140 
Strike,  the,  406 
Struggle  for  existence,  37 
Sumptuary  laws,  486 

Taborites,  534 

Talent,  waste  of,  70 

Tariff,  paid  by  consumer,  348 ;  paid 

by  foreign   producer,   349 ;    when 

prohibitive,  350 
Taussig,  F.  W.,  124,  note 
Tax,  definition  of,  504 
Taxation,  canons  of,  51 1 ;  progressive, 

511 ;  repressive,  512 


Taxes,  inheritance,  509 

Thrift,  105 ;  and  the  laborer,  582 

Tillage,  210 

Token  currency,  301 

Tools,  compared  with  machinery,  121 ; 
compared  with  consumers'  goods, 
1 60;  as  consumers'  goods,  467  ;  as 
inducement  to  work,  468 

Trade  union,  403 

Transportation,   233 ;    types   in   use, 

23? 
Trust,  the,  175 

Unemployed,  the,  66 
United    States,   geographical   advan- 
tages of,  82 

Unskilled  labor,  scarcity  of,  392 
Utopias,  532 

Valuation   and  exchange,   264 

Value,  and  esteem,  267 ;  and  price, 
268 ;  economic,  269 ;  reasons  for, 
272,  273 ;  determined  by  scarcity, 
274;  relation  of  utility  to,  275; 
of  a  man,  458 

Variable  proportions,  law  of,  367 

Veblen,  Thorstein,  76 

Vice,  as  waste  of  energy,  72  ;  control 
of,  487  ;  as  a  fool-killer,  490 

Voluntary  agreement,  47 

Wages,  causes  of  difference  in,  388 ; 
summary  of  discussion  of,  399 

Waiting,  irksomeness  of,  429 

Walpole,  223 

War,  financing  a,  514 

Wealth,  two  meanings  of,  13;  and 
well-being,  13  ;  ten  characteristics 
of,  21  ;  right  of  men  to  accumulate, 
69 ;  ways  of  acquiring,  192,  193 ; 
economical  ways  of  getting,  194 

Well-being,  social,  8 


Date  Due 

JAN  i  C 

Ml*       •>  : 

;-j6  7 

APt?      o 

HrK      3   j 

1  Q7?  Q 

JuL^t 

* 

Library  Bureau  Cat.  No.  1137 

